How to reduce tax burden when withdrawing from investment account for family distribution

Would it make any difference if she transfers stocks directly to her kids instead of cashing out and then gifting the money? I've heard something about a "step-up in basis" but I'm not sure if that applies here or only when someone dies.

Direct transfer of stocks (in-kind transfers) can sometimes be advantageous, but it doesn't avoid the tax situation entirely. A "step-up in basis" only applies when assets are inherited after someone's death - it doesn't apply to gifts made during someone's lifetime. With in-kind transfers, the recipient takes on the original owner's cost basis and holding period. So if your mother-in-law bought stocks at $50k that are now worth $100k and transfers them directly, the kids would inherit her $50k basis. When they eventually sell, they'd pay taxes on gains above that $50k basis. But the mother-in-law wouldn't pay taxes at the time of transfer.

How exactly does it work? Like do I need to upload my personal tax returns and investment statements? Seems risky to share all that financial info with some random website.

Does it actually tell you what specific strategy to use or just gives general info? Like for OP's situation, would it tell them which accounts to withdraw from first or how to time distributions to minimize taxes?

The tool works by analyzing any documents you upload - like investment statements, tax forms, or even just screenshots of your account summaries. They use end-to-end encryption so your documents stay private. I was skeptical at first too but they don't store your actual docs after analysis. It gives specific recommendations based on your situation, not just general advice. For example, in a case like OP's, it would analyze the mother-in-law's specific investment type, compare lump sum vs multi-year distribution strategies, and even calculate optimal withdrawal timing based on tax brackets. It'll show the exact tax difference between taking it all out in December 2024 vs spreading it into January 2025.

Wait this actually works? I've been trying to reach the IRS for 2 months about an inheritance tax question. How does this even work? Do they just keep dialing for you or something?

Sounds like a scam tbh. Nobody can get through to the IRS that fast. Even tax professionals wait for hours. They're probably just connecting you to some random person pretending to be from the IRS.

It works by using an algorithm that navigates the IRS phone tree and holds your place in line. When they get close to an agent, you get a call to connect you. It's totally legit - the person you talk to is actually at the IRS call center. They basically handle the annoying waiting part so you don't have to sit on hold forever. My call was with an official IRS representative who verified my information and everything. I even called the IRS back later to confirm the information I got was legitimate, and it was exactly right. It's not some magic backdoor - you're just getting in the regular queue without having to stay on the phone yourself.

It's a standard brokerage account, not retirement or anything special. She's owned it for about 12 years. The original investment was around $165k and it's grown to about $270k now. No special conditions other than she had to keep it for 10 years minimum per some agreement with the investment company.

Thanks for clarifying - that makes a huge difference! Since it's a standard brokerage account, she'll only pay capital gains tax on the growth portion (about $105k based on your numbers), not the entire $270k. If she's held it over 1 year (which she has at 12 years), she'll pay long-term capital gains rates, which are much lower than ordinary income tax rates - likely 15% for most people. Instead of withdrawing everything and then gifting cash, she could consider transferring shares directly to her children (in-kind transfer). This passes the tax obligation to the kids, who might be in lower tax brackets. They'd inherit her cost basis but could sell according to their own tax situations.

Good point. I ended up using both an advisor AND some tax software to model different scenarios when distributing my dad's investment account last year. The advisor cost me $400 but saved us about $8k in taxes by structuring the withdrawals properly.