Posted on January 17, 2024 by Katherine Fox.
Many people who inherit stock positions need support from a financial advisor, but it can be difficult to know what questions to ask, especially if your advisor doesn’t specialize in working with inheritors.
If you have inherited stock, you need to understand what stock you have inherited and how it is held, the tax consequences of your inherited stock, how inherited stock fits into your risk tolerance and long-term financial picture, how you can give inherited stock away, and whether you should hold or sell inherited stock positions.
1.wWhat stocks have I inherited and how much are they worth?
You should request a detailed report from a financial advisor containing information on all the stocks you have inherited. This analysis should include the companies’ names, the total shares you own of each company, and when those shares were purchased.
This information creates a foundation for evaluating the risks and opportunities associated with each individual stock. A financial advisor can educate you on the performance and risk profile of individual stocks and help you make decisions about adjusting or selling your holdings.
When you have inherited stock, a financial advisor should be able to explain why stock positions were held and invested the way they were and whether it is advisable to hold positions in their current weights or rebalance your portfolio to diversify your wealth and create a more appropriate risk profile.
2. What is the cost basis of my inherited stock?
You should ask your advisor to give you cost basis information for all inherited stock positions. Frequently, inherited stock will receive a step-up in basis, meaning your cost basis in the position is equal to the position’s value as of the date of death of the person you inherited from. If you received a step-up in basis, you can be less worried about the capital gains tax you will have to pay if/when you sell assets.
Not all inherited stock positions receive a step-up in basis. If you inherited through an irrevocable trust or a named deed, you may not receive a step-up in basis.
If you didn’t receive a step-up in basis on inherited stock it is essential to figure out the original cost basis of the person you inherited from. Depending on how this person kept records, it may be difficult to figure out when they purchased the stocks and how much they were purchased for. A financial advisor should be able to help you with this search and connect you with a qualified accountant who can assist if needed.
What to ask a Financial Advisor about Inheriting Stock?
3. In what type of account is my inherited stock held?
How you inherit stock will determine how much control you have over the stock positions and how they are taxed.
If you inherit through a revocable trust, IRA, or taxable brokerage account. You would have full control over the inherited stock and be able to sell positions and diversify the account to match your personal risk profile. If you inherited stock through an irrevocable trust account, you may not have control over the inherited stock positions. Instead, investment decisions may be at the discretion of an independent trustee.
If you inherited stock through a trust or taxable brokerage account, you will need to pay attention to cost basis when you sell positions.
If you inherited stock through an IRA, selling inherited stock would not have any tax consequences. In the case of a pre-tax (traditional) IRA, taxes on the account are not realized until money is withdrawn from the account. You are free to rebalance the account tax-free, the cost basis of positions in an inherited IRA is not relevant to your overall tax calculations.
4. Do any of these inherited stocks pay dividends? What are the frequency and amounts of these payments?
You will want to ask your financial advisor if your inherited stocks pay dividends and, if so, how often they are paid and how much you should expect to receive.
Understanding the dividend yield of inherited stock positions is helpful in determining if the stocks are a good fit for long-term hold positions or if you would rather rebalance your portfolio into investments aligned with your long-term growth and income needs.
The dividend yield of inherited stock positions is also important because you will be taxed on stock dividends received. If you don’t have a need for current income, dividend-paying inherited stocks may not be the most tax-efficient choice for your investment portfolio.
5. Are there any immediate tax consequences from inheriting stock?
In addition to income tax incurred from stock dividends and capital gains tax incurred when you sell stock, inheritors should ask a financial advisor if they will have to pay inheritance tax.
Six states have an inheritance tax on assets, including inherited stock positions. This inheritance tax is based on where the person who died lived and held property, NOT on where you live as the inheritor.
If the person you inherited stock from lived in Nebraska, Iowa, Kentucky, New Jersey, Maryland, or Pennsylvania, you may have to pay inheritance tax on inherited stock.
Paying this tax may require you to sell some inherited stock. If that is the case, you should work closely with your financial advisor and a qualified account to build a plan that doesn’t incur more taxes as you raise funds to pay your tax bill.
6. How do these inherited stocks align with my overall risk tolerance?
You should ask a financial advisor if your inherited stock positions are in line with your overall risk tolerance. As part of your investment review, a financial advisor should ask you questions about your comfort with risk and long-term financial goals to help you set an appropriate risk tolerance level.
Your advisor should then help you understand how your inherited stock positions fit into your risk tolerance. Depending on the stocks you inherited, your positions may be too risky, too conservative, or just right.
7. Should I diversify my inherited stock positions?
You want to ask your financial advisor if your inherited stock portfolio is appropriately diversified. This question applies both to your inherited positions themselves and also how those inherited positions fit into your existing portfolio.
You will want to maintain an appropriate level of diversification in your portfolio across both company size and location. In the United States you will want your inherited stock positions to be split across small, medium, and large companies across a range of industries. Internationally, you will want your inherited stock positions to have the same exposure to company size and industry in addition to being diversified across countries and regions.
8. How can these inherited stocks help me achieve my long-term financial goals?
The most important question to ask about inherited stock is how your inheritance can help you achieve your long-term financial goals. A financial advisor should never lose sight of the fact that inherited wealth can open up new freedoms in your life and provide opportunities to create positive impact in the world around you.
A financial advisor should be able to explain how your inherited stock positions can help you achieve your short, medium, and long term financial goals and also how they may open up new goals that previously seemed out of reach.
9. How can I give some of these inherited stocks to charity?
Inheriting stock positions can open up new ways of giving to charity. A financial advisor should be able to help you navigate these options as you build a plan to support causes and organizations that align with your personal values.
For example, instead of making donations online to organizations you support, you may be able to transfer stock directly to avoid selling it yourself and paying capital gains tax.
Depending on your age, you may also be able to make Qualified Charitable Distributions directly from an inherited IRA.
10. Is it advisable to hold, sell, or consider other strategic options for these inherited stocks?
After assessing all relevant areas of your financial picture and your inherited stock positions, an advisor should be able to issue a final recommendation on whether you should hold, sell, or consider other strategic options for inherited stocks.
An advisor’s recommendation will depend on your unique financial goals, timeline, and risk tolerance as well as on the advisor’s own investment philosophy.
Many advisors prefer not to hold portfolios of individual stocks, as they are more difficult and expensive to track and harder to appropriately diversify. If this is the case, an advisor will provide options to diversify your portfolio of inherited stocks towards mutual funds, ETFs, or other assets in a tax-efficient way that supports your long-term financial priorities.
Let’s take the next step together
Understanding what to do with inherited stock positions is not easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Terms Inheritors Need to Know or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to manage your inherited stock positions.
