Are you going to receive an inheritance from a loved one when they pass away? Obviously this is a generous gift from someone who wants you to do well in the future. However, there are many different types of inheritance. Some of them are easier to understand than others. For example, if investments aren’t your strong suit, then you might face confusion if you receive stocks as inheritance. How do you handle inherited stocks?
What Are Inherited Stocks?
A person can leave anything they own to almost anyone they want through use of a will. Therefore, if someone you love owns stocks, then they can leave those to you as an inheritance. At the basic level, it simply means that when the person passes away, the stocks pass on to you. They become your stocks. There are, of course, many different types of stocks. And now they’re all yours. So you have to learn how to handle inherited stocks if you want that money to be a good thing, rather than a burden.
Managed vs. Unmanaged Inherited Stocks
The first thing you’ll learn when trying to handle inherited stocks is that they may or may not be managed investments. If the person who left them to you outlines in the will exactly what you’re to do with them, then they are managed stocks. If not, then they are unmanaged stocks. A majority of inherited stocks are unmanaged stocks. Therefore, what you do with those stocks is up to you as soon as they pass into your hands. In order to know how to handle inherited stocks without any instruction from the person who left them to you, you need to make sure that you understand the stocks that you’ve received.
Tax Losses and Gains on Inherited Stocks
You can sell your inherited stocks at any time that you wish. However, it’s important to understand that you’re going to have to deal with this come tax time. Timing could be everything if you want to pay the least in taxes or get the most tax benefit out of them. Kiplinger explains that typically how you handle inherited stocks has to do with the value of the stock at the time of the person’s death (when you received the stock) and at the time of sale. The value at the time of purchase doesn’t matter.
Your tax amount depends on the difference between the value at the time that you received it and the value at the time that you sell it. So, for example, let’s say that you receive $10000 in stocks through an inheritance. It doesn’t matter that the person giving it to you spent $1000 (or for that matter $100,000) at the time of purchase. All that matters for tax purposes is that it was valued at $10000 on the day that person died.
You sell the stock and the difference is your tax information. If you gain money, then you pay taxes on those gains. So, if you sell the stocks for $15,000, you’ll pay taxes on $5000. (That’s the difference between the $10000 value at time of death and the amount you sold it for.) On the other hand, if you sell it at a loss, let’s say for $7000, you’ll be able to deduct the loss on your taxes. In that instance, you could deduct $3000, which is the difference between the $10000 value at time of death and the amount you sold it for.
Should You Sell Inherited Stocks?
If you’re in need of the money, it’s not a terrible thing to take a loss. After all, this was “free money” and you still get that cash plus the tax deduction. In fact, if you’re in a position where you need to offset capital gains, it could make sense to take the loss. But obviously if you believe the stock will rise in value, and you’re in the position to hang on to it, then you might want to hold off and sell later. In that sense, you handle inherited stocks just like any other stocks you have.
Step One: Figure Out what You Have in Stocks
The most important thing for you to do when you receive inherited stocks is take stock of what you now own. Whether or not you’re already skilled at investing, this is now your money. Therefore, it’s your responsibility to make the most of it. And before you can do that, you have to get a good working grasp on what you have.
Grief can complicate this process. Let’s say that your mother leaves you a stock inheritance. That means your mother has recently passed away. Hopefully if she had the foresight to take care of this inheritance for you, then she also made arrangements for her own end-of-life costs. But your mother might have accrued a lot of end-of-life medical debt or other expenses. Therefore, you could have immediate financial concerns to deal with as well as the grief of trying to cope with losing your mother. All of this can make it hard to think clearly when it comes to how you want to handle your inherited stocks.
Therefore, if at all possible, wait until you have a clear mind to deal with them. Once you’re ready, sit down and review everything. Get clear on all of the stocks that are now in your name. What kind of stocks are they? How much money are they valued at? Do they reflect your personal investment values and goals? Once you know what you’re working with, it will be a lot easier to decide what to do. What if you find that you don’t understand what you have? Then, it’s worth it to invest in a personal finance advisor to guide you.
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