The loss of a loved one is painful and can bring many emotions to the surface. When it comes to handling inheriting stocks, however, take the emotion out of it and make rational, instead of sentimental, decisions.

The death of a loved one brings a flood of emotions into your life. And if you’ve inherited stocks from this person, those emotions might become more complicated by financial aspects. But handling your inheritance of shares the right way can provide both long-term benefits and honor the memory of this person.

The most important feature of inheriting shares of stock is the tax benefit. That’s because the cost basis of these stocks — that is, what the IRS considers their original value — is the stocks’ price per share when the original owner died.

Say the original owner of Microsoft stock (ticker: MSFT) bought the shares on March 17, 1986, for an adjusted price of 7 cents per share. The owner then died on Feb. 1, 2021. By that time the price per share had increased to $239.65.

If the original owner had sold the Microsoft shares on Feb. 1, the capital gains tax (which for most people is 15% of the gain) would have been based on buying the shares at 7 cents. That is, the original owner would have paid taxes on the stock price appreciation from 7 cents to $239.65, or 15% of $239.58 for a tax of $35.94 per share sold.

But since you’re inheriting the shares, your cost basis in the eyes of the IRS is $239.65. If you decide to sell the shares on Feb. 1, you might owe nothing in taxes. That’s quite a tax benefit. For this reason, you might want to cash in the shares you inherit if you have an immediate use for the money.


Look for Quality in Inherited Stocks

But the smarter move might be to study the investment potential of each stock, adding the ones to your portfolio that pass your criteria and selling the rest. It’s common for people to hang on to stocks too long which have performed well over the years but may no longer be sound investments. It’s important to undertake a fresh, impartial review of each holding.

Don’t be sentimental about any of the stocks. They might kindle fond memories of the original owner, but they’re financial holdings, not keepsakes.

The best way to review a stock is to ask yourself two questions:
  • Is this a quality stock?
  • Is the stock’s investment potential suitable for my portfolio?

To determine whether you’ve inherited a quality holding, you should study the company’s financial performance over the past 10 years. You’re seeking steady growth in earnings and sales. You’ll also want to look at how well management does its job. If the stock passes this first test, you’ll then want to determine whether the stock has reasonable investment potential.

BetterInvesting has all the tools and resources you need, including historical data, easy-to-read graphs and helpful tutorials, to help you make smart decisions.


Selling Stocks

If you decide to sell any of the stocks, remember that you pay taxes based on the difference in the sale price and your stepped-up basis. And if the stock’s price decreased after you inherited it, you could record this as a loss and potentially reduce your tax bill.

The decision to sell might be easier if you’re splitting ownership of the stocks with family members or others. You can all make your own investment decisions using the proceeds, and there’s little potential tax consequence.


Other Tips

Transferring stocks requires some legal steps, so make sure to work with the will’s executor and the right professional. Depending on your situation, some of the steps might include:
  • Transferring the shares into your account.
  • Obtaining the proper forms and legal paperwork.
  • Verifying your cost basis.
And if you sell any stocks, keep the transaction records and match them against your brokerage statement; work with your broker to resolve any conflicts.

The loss of a loved one is painful and can bring many emotions to the surface. When it comes to handling inheriting stocks, however, take the emotion out of it and make rational, instead of sentimental, decisions.

Adam Ritt, Former Editor-in-Chief of BetterInvesting Magazine, joined BetterInvesting in 2002 as the managing editor of BetterInvesting Magazine and was overseeing the content creation and production of all BetterInvesting print and online publications.  His BetterInvesting Magazine articles frequently were reprinted in various publications. Adam’s article, “World of ADRs," is currently being used for a 400-level accounting course at the University of Washington.

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