If your loved one dies and leaves behind a significant portfolio of stocks, navigating the legal process to liquidate those assets can be complicated and often stressful. If you are the executor or the trustee in charge of handling the estate’s property, the complexities are even more significant.
A beneficiary of a deceased loved one’s stocks must consider several factors, such as the legal, financial, and tax implications of inheriting assets through stocks. For this reason, it’s advisable to consult with an experienced lawyer before making any decisions about how to distribute assets and whether to liquidate stocks.
How Does the Probate Process Work for Stocks?
Stocks are one of the key assets that belong to an individual after they pass. Therefore, stocks are treated like any other asset and will go through the probate process to determine how to properly transfer ownership after the investor passes.
How stocks are managed during the probate process will depend on several factors:
- If the testator left a will, the terms should typically outline whether the stocks should remain in the investment accounts or if they should be sold and liquidated.
- If the settlor included the stocks in a trust, a trustee will distribute the share or the liquid assets in line with the terms outlined in the trust.
- If a settlor named a transfer-on-death (TOD) beneficiary, then ownership of the stocks will transfer over to the named beneficiary.
- If there is no will or trust, or no named beneficiary for the investment accounts, then stocks will pass through the probate process, where the court will determine who will receive either the accounts or the liquidated assets through intestate succession laws.
When stocks do go through the probate process, it will be up to the executor to gather a full portfolio of the decedent’s stocks, determine the value of these assets, and transfer ownership accordingly. If there is no will or trust outlining how to divide stocks, the personal representative in charge of administering the estate will be responsible for determining how to distribute stock assets with the best interests of the estate in mind. Typically, the administrator will need to determine whether to liquidate the stock and distribute the proceeds or distribute the stock directly.
If there are any questions or disputes surrounding the distribution of stocks or other assets during the probate process, then you should seek out anestate and probate administration attorneyas soon as possible.
How Do You Liquidate Inherited Stock?
The process for liquidating inherited stock is fairly straightforward, as beneficiaries will often receive control over their share of the stock once they inherit it. Then, once the stock is in the beneficiary’s brokerage account, they can sell the stock by placing a sell order through the brokerage. The beneficiary can choose to sell the stock all at once or to sell it in smaller portions over time.
Before liquidating inherited stock, however, beneficiaries should keep in mind that the sale may have tax implications. We suggest consulting with a tax professional before making any decisions about selling your inherited stocks so that you can maximize financial gains and minimize any required tax payments.
How Do You Manage and Sell Stocks in an Estate Account?
When you first inherit stocks through an estate account, the stocks will be managed by a personal representative, like an administrator or executor, who is responsible for safeguarding the stocks and managing distributions to beneficiaries in accordance with the estate planning documents.
The terms of the estate planning documents will determine how you receive access to your inheritance and whether you inherit stock from a trust or stock held in trust. If you inherit stock from a trust, you will have access to the stock and acquire full ownership. If you inherit stock held in trust, ownership of your shares still belongs to the trust under set conditions, and the trustee will distribute your shares in accordance with the instructions laid out by the trust document.
The personal representative or trustee also plays an instrumental role in whether stocks are sold or liquidated. Whether stocks should be sold depends on the terms of the will or trust as well as the best interests of the beneficiaries.
For example, if there are multiple beneficiaries, the personal representative or trustee may find that it is easier to liquidate the assets in the stocks and distribute a percentage of the funds to each of the beneficiaries.
If you receive your inheritance in the form of stocks, you have the option to hold the investments or sell the stock to liquidate the assets. From there, a broker can help you sell the stock either in full or in part. An attorney can also help provide guidance in this process by helping you understand your options.
Should the Executor Liquidate Stocks?
Whether an executor should liquidate stocks depends on the specific circ*mstances of the estate and the goals of the beneficiaries. The decision to liquidate stocks should be made in accordance with the terms of the will and with the best interests of the beneficiaries in mind.
If the will specifies that the stocks should be sold, then the executor is obligated to follow the terms of the will and liquidate the stocks. Likewise, if the will specifies that the stocks should be transferred, the executor must obey those instructions.
However, if the will does not specify what should be done with the stocks, then the executor should consider the financial needs and goals of the beneficiaries when making a decision about whether to sell the stocks.
Regardless of the decision, the executor has a fiduciary responsibility to act in the best interests of the beneficiaries and to manage the estate’s assets prudently. If the executor is unsure about whether to liquidate stocks, they should consult with an estate attorney for guidance.
How Should We Divide Inherited Stocks?
The division of inherited stocks should be guided by the terms of the will or trust if one exists. If no estate planning documents are available, then the stocks must be divided according to state intestacy laws.
If the deceased person had a will or trust, it should specify how the stocks and other assets should be divided among the beneficiaries. The executor or administrator of the estate should review the will to determine the exact terms of the distribution.
However, if the deceased person did not leave any estate planning documents explaining how their assets should be distributed, the stocks will be allocated according to the intestacy laws of the state where they passed away.
State intestacy laws dictate how the person’s assets, including stocks, should be distributed among their heirs. The specifics of intestacy laws vary by state, but generally, the assets are distributed among the deceased person’s closest surviving relatives, such as their spouse and children.
Do Beneficiaries Pay Taxes On Inherited Stocks?
No, beneficiaries typically do not pay taxes on inherited stocks they do not sell.
This is because the U.S. has no federal inheritance tax and only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) levy inheritance taxes at the state level. Additionally, even in the states that have inheritance taxes, close family beneficiaries, and smaller inheritances are often exempt.
However, stocks inherited through the probate process can be subject to estate taxes if the deceased person has a large enough estate. Nonetheless, the estate pays the taxes, not the beneficiary who will inherit the stock. By the time the beneficiary inherits the stock, the executor of the estate will have already handled the estate taxes, and the beneficiary will not have to pay.
How To Avoid the Capital Gains Tax
Still, it’s important to keep in mind that beneficiaries do have to pay income taxes on their taxable gains if they sell inherited stocks. Capital gains taxes are paid on any profits received from selling assets that increased in value over time, like stocks or property. For example, if a settlor invested $10,000 and yielded a $15,000 return, then taxes will be owed on the $5,000 profit from the initial investment when the stocks are sold.
However, in cases where the stocks are inherited from a decedent, the taxable amount will be calculated by subtracting the stock’s fair market value (FMV) on the day the deceased person passed away from the final sale price. So if you sell an inherited stock for more than it was worth on the date of death, the difference will be considered a taxable gain.
Another method for avoiding the capital gains tax is to sell the stock as soon as possible after an individual’s death. Selling the stocks as soon as possible will minimize the chance of the stocks increasing in value and putting you on the hook for capital gains taxes up to 30%.
A trustor leaving a revocable trust often makes this process easier and minimizes the chances of accruing high capital gains taxes as it allows for a simpler transfer from the trustor to beneficiaries. Using a revocable trust to hold stock assets also minimizes the risk of paying high estate taxes.
The capital gains tax may also be avoided if the trust specifies that the stocks should be liquidated before distributing to beneficiaries. This process allows the inheritance to be distributed as tangible funds instead of stocks, preventing the potential obligation of a capital gains tax associated with investment account gains.
In any case, you should seek out the support of a skilled financial advisor to provide you with additional guidance surrounding your options and how to minimize your tax burden on inherited stocks.
Can I Contest How Stocks Are Distributed?
Yes, you may be able to contest how stocks are distributed in some situations. However, it’s essential that you understand that you cannot contest the distribution of stocks just because you disagree with the deceased person’s wishes. Generally, the distribution of stocks and the estate’s other assets will be controlled by the deceased person’s will or trust.
If this document provides explicit instructions for how the stocks should be distributed, the executor or trustee is legally obligated to comply with them. For this reason, you typically won’t be able to challenge the distribution without contesting the legal validity of the estate planning instrument itself.
However, there may be some instances where the will or trust does not explicitly detail who should receive stocks or how they should be distributed. In these instances, you may be able to contest a distribution of stocks that goes against the deceased’s expressed wishes or is not in the best interest of all of the beneficiaries. Similarly, if a fiduciary is charged with managing stocks on behalf of its beneficiaries, a beneficiary may be able to contest the trustee’s division of stock amongst the beneficiaries’ shares of the trust if the division unreasonably favors one beneficiary over the others.
If you disagree with how stocks are being distributed after a loved one’s death, you should consult with a knowledgeableprobate litigation attorneyas soon as possible. Your lawyer will be able to explain your rights under the will and trust involved or local intestacy laws and advise you as to whether you have an enforceable legal claim.
Find Support in Understanding Your Inheritance
If you received stocks through an inheritance, it’s important that you understand the options available to you, from holding the stock to liquidating the assets. Between taxes, legal obligations, and your options for liquidating assets, there is a lot to consider. A probate administration attorney can be a valuable resource in helping you understand the terms of your inheritance, what your options are, and appropriate next steps.
Our team of attorneys at RMO will take the time to listen to you, help you weigh your options for managing inherited stock, and provide guidance throughout the probate process. We’ll use our experience to help you understand the laws around inherited stocks and navigate any legal processes so you can receive your rightful inheritance as soon as possible.
Inheriting stocks can be confusing, soschedule a consultationwith us at RMO to get support in understanding the process.
RMO LLP provides personal and efficient inheritance dispute services to individual and institutional clients. The firm’s attorneys focus on probate litigation involving contested trust, estate, probate, and conservatorship matters. Serving California and Texas, with offices in Los Angeles, Pasadena, Orange County, San Diego, Fresno, the Bay Area, Dallas, and Houston. For more information, please visitRMO Lawyers.
