What Happens to Your Stocks When You Die?

When an individual passes away, their financial assets, including stocks, transition to new ownership. The specific path stocks take after an owner’s death depends on how they were held and the estate planning provisions made by the deceased.

How Stocks are Passed On

Stock transfer after death depends on the account type and prior designations. Assets can either go through a formal legal process called probate or bypass it entirely. Probate is a court-supervised process that validates a will, inventories the deceased’s assets, settles debts, and distributes remaining property to heirs. Stocks held solely in the deceased’s name without specific beneficiary designations typically go through probate.

To avoid probate, accounts often use beneficiary designations. One common method involves beneficiary designations, such as a Transfer on Death (TOD) for brokerage accounts. A TOD designation allows the account owner to name one or more individuals who will automatically receive the assets upon their death, bypassing probate. Similarly, Payable on Death (POD) designations are used for bank accounts, enabling a direct transfer of funds to a named beneficiary. These designations are effective because they supersede instructions in a will, ensuring assets pass directly to the named individual.

Another mechanism for transferring stocks outside of probate is joint ownership with right of survivorship. When stocks are held in joint tenancy with right of survivorship (JTWROS) or as tenancy by the entirety, the assets automatically pass to the surviving owner(s) upon the death of one owner. This form of ownership means the surviving joint owner(s) assume full ownership without the need for court intervention. In community property states, assets acquired during marriage are generally considered equally owned by both spouses, and specific rules apply to how these assets, including stocks, are transferred upon death.

For assets held within a trust, the terms of the trust dictate how stocks are distributed. A trustee, appointed by the trust, is responsible for distributing shares or liquid assets according to the trust’s provisions.

Tax Considerations

Inherited stocks have various tax implications. One of the most significant tax benefits for inherited assets, including stocks, is the “stepped-up basis.” This rule adjusts the cost basis of the inherited asset to its fair market value on the date of the original owner’s death. For example, if stock was purchased for $100 and is worth $500 at the time of the owner’s death, the beneficiary’s cost basis becomes $500. If the beneficiary then sells the stock for $650, capital gains tax is only owed on the $150 increase from the stepped-up basis, rather than the $550 increase from the original purchase price.

Not all inherited assets receive a stepped-up basis. Certain types of income, known as Income in Respect of a Decedent (IRD), do not. IRD typically includes pre-tax retirement accounts, such as traditional Individual Retirement Accounts (IRAs) and 401(k)s, as well as unpaid wages or commissions owed to the deceased. Beneficiaries inheriting these assets generally pay income tax on distributions, as the income was never taxed during the original owner’s lifetime.

Federal estate tax is another consideration, though it applies to a small percentage of estates due to high exemption thresholds. For 2025, the federal estate tax exemption is $13.99 million per individual, meaning only estates exceeding this value are subject to the tax. This threshold is scheduled to increase to $15 million per individual in 2026 and will be adjusted annually for inflation. The tax rate on the portion of an estate exceeding the exemption can be as high as 40%. Estate tax is generally paid by the estate itself, not by individual beneficiaries, and is distinct from income or capital gains taxes.

Capital gains tax applies to beneficiaries if they sell inherited stock for a price higher than its stepped-up basis. Since the basis is reset at the date of death, any appreciation in value after that date would be subject to capital gains tax upon sale. This tax is typically assessed at long-term capital gains rates if the stock is held for any period after inheritance, regardless of how long the original owner held it. If the stock is sold for less than its stepped-up basis, the beneficiary may be able to claim a capital loss.

Steps for Beneficiaries and Executors

After a stock owner’s death, beneficiaries and executors must manage and transfer inherited assets. The initial steps involve gathering essential documents and notifying relevant financial institutions. A certified copy of the death certificate is almost always required by brokerage firms and other financial entities to confirm the owner’s passing. Locating account statements or records, including the deceased’s social security number, is also necessary to identify all holdings.

Next, formally notify the financial institutions where stocks are held. This includes contacting brokerage firms, mutual fund companies, or retirement plan administrators. These institutions will provide specific forms and instructions for transferring ownership. Depending on how the assets were held, additional documentation might be required.

For probate assets, the executor needs court-issued Letters Testamentary or Letters of Administration to manage the estate’s assets. If the stocks were held in a trust, the successor trustee would need a copy of the Certification of Trust.

Once the necessary documents are submitted, the process of initiating transfers or distributions can begin. For accounts with a Transfer on Death (TOD) designation, the beneficiary typically only needs to provide the death certificate and proof of identity to the financial institution. The institution will then re-register the stocks in the beneficiary’s name or establish a new account for them. For assets going through probate, the executor works with the financial institution to transfer the stocks into the estate’s name initially, and then to the designated beneficiaries according to the will or state intestacy laws.

Throughout this process, consulting with financial and legal professionals can provide valuable guidance. An attorney specializing in estate planning or probate can help navigate complex legal requirements and ensure proper adherence to state laws. A tax professional can offer advice on minimizing tax liabilities related to the inheritance, especially concerning the stepped-up basis and Income in Respect of a Decedent.