Can You Inherit Stocks? The Process and Tax Implications

Inheriting stocks can provide a significant financial benefit, and understanding the process and tax implications is important for beneficiaries. The way stocks were held by the deceased, whether in a taxable brokerage account, a retirement account, or a trust, fundamentally shapes the transfer steps and eventual tax treatment.

Understanding Inherited Stock Accounts

Stocks can be held in several types of accounts, and their structure determines how they pass to beneficiaries. Taxable brokerage accounts include individual accounts, which typically pass according to the deceased’s will or state intestacy laws. Joint accounts, such as joint tenants with right of survivorship (JTWROS), automatically transfer ownership to the surviving account holder upon death, bypassing probate. For accounts held as tenants in common, each owner holds a distinct, undivided interest, and their share typically passes through their estate. Many individual brokerage accounts also allow for a transfer on death (TOD) designation, which permits assets to pass directly to a named beneficiary outside of probate.

Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, are distinct because they are tax-deferred or tax-exempt. They usually pass via beneficiary designations, which supersede instructions in a will. These accounts are not typically subject to probate, simplifying the transfer process for heirs.

Stocks might also be held within a trust account. This is a legal arrangement where a third party, the trustee, holds assets for the benefit of beneficiaries. Assets in a trust are governed by the trust document’s terms, allowing for specific instructions on how and when assets are distributed. Trusts often bypass the probate process, as the trust document dictates how these assets are managed and transferred after the original owner’s death.

The Process of Claiming Inherited Stocks

Claiming inherited stocks involves several administrative and legal steps to transfer ownership. The initial action involves locating account statements or other financial records of the deceased to identify where the stocks are held and contacting the relevant financial institutions or brokerage firms. These institutions have specific procedures for handling inherited assets and can provide necessary forms and guidance.

Beneficiaries will typically need to provide various documents to the financial institution. Common requirements include a certified copy of the death certificate, proof of identity for the beneficiary, and sometimes a completed beneficiary designation form if one was in place. If the stocks pass through the deceased’s estate, a court-issued document such as Letters Testamentary or Letters of Administration may be required. These legal documents grant the executor or administrator the authority to act on behalf of the estate and facilitate the transfer of assets. An affidavit of domicile might also be requested to confirm the deceased’s legal residence, which determines the applicable state laws.

Once the necessary documentation is submitted and approved, the brokerage or custodian will usually set up a new account in the beneficiary’s name to hold the inherited assets. For inherited retirement accounts, this means opening a specific “inherited IRA” or “beneficiary IRA” rather than simply transferring funds into an existing personal retirement account, especially for non-spouse beneficiaries. If the stocks are part of an estate that goes through probate, the court process can take several months to over a year, depending on the complexity of the estate and state laws, before assets can be formally distributed.

Tax Implications of Inherited Stocks

Inheriting stocks carries specific tax implications. For stocks held in taxable brokerage accounts, the “step-up in basis” rule applies. This rule resets the cost basis of the inherited stock to its fair market value on the date of the original owner’s death. This adjustment can reduce or eliminate capital gains tax if the beneficiary sells the stock shortly after inheriting it, as taxes are only owed on any appreciation from the date of death.

Distributions from inherited retirement accounts, such as traditional IRAs and 401(k)s, are taxed as ordinary income to the beneficiary. These are considered “Income in Respect of a Decedent” (IRD). For most non-spouse beneficiaries, the SECURE Act of 2019 introduced a 10-year rule, requiring the entire inherited account balance to be distributed by the end of the tenth year following the original owner’s death.

There are exceptions to the 10-year rule for “eligible designated beneficiaries.” These include surviving spouses, minor children of the deceased (until they reach the age of majority, when the 10-year rule then applies), chronically ill or disabled individuals, and individuals not more than 10 years younger than the deceased. These beneficiaries may have more flexible distribution options, potentially allowing them to stretch distributions over their own life expectancy. Federal estate tax applies only to very large estates, with an exemption of $13.99 million per individual in 2025.