I Inherited Stocks: What to Do Next

Inheriting stocks presents both opportunities and responsibilities. Understanding the financial and administrative steps involved is important. This guide clarifies the process of managing inherited stocks, from initial identification to understanding tax implications and evaluating future options.

Identifying and Documenting Your Inheritance

Gathering specific information and documentation is the first step when inheriting stocks. This ensures you have the necessary legal standing and financial details to proceed. You will need documents such as the deceased’s will or trust, a certified copy of the death certificate, and recent brokerage statements.

The will or trust documents confirm your legal right as a beneficiary and any specific instructions regarding the stocks. A certified death certificate serves as official proof of death, required by financial institutions for asset transfers. Brokerage statements provide essential details like account numbers, the specific stocks held, and their quantities.

Other helpful information includes the deceased’s social security number, date of birth, and contact details for the estate’s executor or administrator. Knowing where these documents are stored, such as in a safe deposit box, personal files, or with an estate attorney, can expedite the process.

Process for Transferring Ownership

Once you have gathered the required documentation, the next step is initiating the transfer of stock ownership into your name. The process begins by contacting the deceased’s brokerage firm or the transfer agent if the stocks were held directly with the company.

You will need to complete specific forms, such as transfer of death or inheritance claim forms, provided by the financial institution. Along with these forms, you will submit the previously obtained documents, including the certified death certificate and proof of your legal authority, such as letters testamentary if the estate is going through probate.

If the stocks were held in a joint account or had a transfer-on-death (TOD) beneficiary designation, the transfer process is more straightforward, bypassing probate and allowing direct transfer to the named beneficiary. The financial institution will then process the request, which can take several weeks depending on the complexity of the estate and the institution’s procedures.

Understanding the Tax Implications

Inheriting stocks involves specific tax considerations. A primary concept is the “stepped-up basis,” which applies to inherited assets. This means the cost basis of the inherited stock resets to its fair market value on the date of the original owner’s death. This adjustment can significantly reduce potential capital gains taxes if you later sell the stock. For instance, if stock purchased for $100 is worth $500 at the time of death, your cost basis becomes $500, not $100.

When you sell inherited stocks, capital gains or losses are calculated based on this stepped-up basis. If you sell the stock for $650, you would only pay capital gains tax on the $150 gain ($650 sale price minus $500 stepped-up basis), rather than the $550 gain from the original purchase price. Any capital gains on inherited assets are treated as long-term capital gains, regardless of how long the deceased or you held the stock. This long-term treatment results in lower tax rates compared to short-term capital gains.

Any dividends received from the inherited stocks after they are transferred into your name are taxable as ordinary income. The estate may also generate income, such as dividends, before assets are distributed, which would be reported on a Schedule K-1 for beneficiaries to include on their personal tax returns. Federal estate tax is levied on the deceased’s estate itself, not on the beneficiary, and applies only to estates exceeding a high threshold. For 2025, the federal estate tax exemption is $13.99 million for individuals, meaning most estates are not subject to this tax. While federal inheritance tax does not exist, a few states may impose state-level estate or inheritance taxes, which are managed by the estate or paid by the beneficiary depending on their relationship to the deceased.

Options for Your Inherited Stocks

Once the inherited stocks are transferred into your name, you face decisions about their future. These choices should align with your personal financial goals and overall investment strategy. One option is to hold onto the inherited stocks, particularly if they align with your long-term investment objectives, such as growth or income generation. This decision might be suitable if you believe in the company’s continued performance or if the stocks contribute to your portfolio’s diversification.

Alternatively, you might consider selling the inherited stocks. This can be a choice if you have immediate cash needs, want to rebalance your investment portfolio, or wish to diversify away from a concentrated position in a single stock. Selling soon after inheritance can also minimize capital gains tax due to the stepped-up basis, as there may be little appreciation from the date of death. If the stock’s value has decreased since the date of inheritance, selling it could result in a capital loss that may be used to offset other gains, up to $3,000 per year against ordinary income.

Integrating the inherited stocks into your existing investment portfolio involves assessing how they fit within your current asset allocation and risk tolerance. Consulting with a financial advisor can help you evaluate the best course of action based on your unique circumstances and financial objectives.