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Tips on Inherited Stock

Posted by Larry Jones on Jan 1, 2019 9:30:00 AM
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Are you feeling confused by a recent inheritance of stock?

If you're like the majority of folks, you have no trouble in deciding how to handle the inheritance of things like cash and physical property. When it comes to inherited stock, however, it may be a different story. There can be questions about taxation, ownership, and brokerage ownership. Quite possibly, the new owner has no experience with these types of financial vehicles. Almost certainly the new owner will have a different tolerance for risk, and perhaps much different expectations for results.

How will you handle all these issues?  


Time IS on Your Side

The first thing to realize is that you don't need to rush into anything. Most likely the inherited portfolio has been doing just fine for years, and you don't need to do anything hasty at this point. You've probably got a lot of other things to contend with. Perhaps there are pressing estate issues, or maybe even family struggles that need to be resolved. The first thing you need to do is get your bearings, relax, and sort through your issues in order of priority. Sometimes your sudden windfall will be seen by professional salespeople as an opportunity for a quick commission. Tread carefully here.

With that being said, here are three things to keep in mind as you move forward:

1. Determine what your overall plan is.

Finances are just a means to an end. Hopefully you have had a personal financial plan of your own, prior to this inheritance. Make every effort to consolidate the new money into your existing plan. It can be a huge temptation to go out and buy that new Corvette, but it can be wise to take care of things like high-interest debt, or maximize your retirement contributions for the year. The average time that it takes to go completely through an inheritance, believe it or not, is 18 months, no matter the size of the inheritance. Don't change your plan just because of a sudden windfall.

2. Calculate the tax liabilities of selling the stock.

Unless the inherited stock is inside some kind of tax-deferred account, such as a 401(k) or IRA, the tax consequences are probably very minimal. The IRS allows something called a "step-up in basis" when assets pass to the next generation. For example, let's say that your Father paid $50 a share for the stock you have just inherited, and today it's worth $100. If you Dad had sold that stock, he'd have been responsible for paying a capital gains tax on everything the stock earned above $50 a share. But the IRS allows the inheritor (you) to assign the value of the stock at date-of-death, or $100 a share, which effectively wipes out the capital gains tax.

3. Decide whether you should sell.

Once the new stock is in your ownership, should you sell it? That can be a complicated decision. Let's say you have a thousand shares of Apple that have earned your Father an average 130% rate of return over the years, and you'd like to sell them to buy stock in that new cow-methane and solar power startup that everyone's talking about. If this describes you get out of the market now. You are not smart enough to invest anything with anyone. You should, however, evaluate things like risk tolerance, and diversification to arrive at your decision whether to sell or not. Your personal preferences about the broker may be a factor. As a general rule, you'll want to diversify into a broad mix and make sure that you attempt to get the most return for the least amount of risk.


A Windfall Can Be a Wonderful Thing!

Do take care, however, that you take the time to calmly and rationally fold your new assets into your existing plan. Doing this will take a lot of strain off of your decision, and you'll be able to sleep better at night. 

Until next time,

Larry

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As a fiduciary I am required to always act in your best interests, and as a professional planner, it's my job to be familiar with all types of possible solutions and financial vehicles. In short, I have no interest in selling any particular product or any affiliation with a particular company. I work for my clients.

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