What should you do after inheriting investments?
What should you do after inheriting investments?
Inheriting investments after a loved one passes away can be a logistically challenging experience.
Depending on the investments, how/where they were held, and your level of technical expertise, you may be in for a months-long process before you finally have things under control.
If you’re not used to the technical language and process of the investment industry, this process may be frustrating and confusing.
Keep reading for everything you need to know about what to do after inheriting investments. I’m an inheritor myself and I’ve spent the better part of the last decade helping other inheritors manage their investments and financial lives.
I’ve got ALL the information and tips you need to understand what to do and make a plan after inheriting investments.
Posted on July 11, 2024 by Katherine Fox.
What should you do after inheriting investments?
Most people don’t have any idea where to start after inheriting investments.
It’s like learning a new language, while you’re grieving and managing a million other death-related details.
It’s also really hard to find someone to help.
You might be wondering:
How do I get my inherited investments transferred into my own name?
How do I learn more about the investments I inherited?
What are the tax implications of my inherited investments?
Should I keep or sell my inherited investments?
How do I build a plan to align my inherited investments with my long-term financial goals?
Luckily, you ended up here.
Keep reading for the 5 steps you NEED to take after inheriting investments
You’re closer than you’ve ever been to finding answers to these questions and building a plan to manage your inherited investments.
I’m Katherine. I’m a CFP® and investment advisor for inheritance.
I’m here to help you through this journey, whatever your needs are.
If you’re trying to get up to speed, check out the 20 Terms Inheritors Need to Know or How to Talking to Your Parents About Their End-of-Life or Estate Plan.
And if you’re deep in the weeds and don’t know what to do next, schedule a FREE consultation to see how I can help you build a plan to understand, manage, and grow your inherited investments.
1.lTransfer your inherited investments into an account in your name
Investments inherited outside of retirement accounts (like IRAs and 401(k)s, keep reading for more on that below) will be held in what the industry refers to as a “taxable brokerage account.”
What does that mean?
It’s what the average person would consider to be their “investment account” “stock account” or similar.
But let’s break it down further:
Taxable - the income that is generated by this account is taxable in the year it was received. It doesn’t have the tax preferences of retirement accounts like 401(k)s or IRAs. When you sell funds in this account, you will pay tax on your realized capital gains in the year of the sale.
Brokerage - this is the technical name for an account where investors can hold stocks, mutual funds, ETFs, and other securities. You might have a brokerage (aka “stock” or “investment”) account at a broker like Charles Schwab, Fidelity, Vanguard, Robin Hood, E*Trade, or a similar company.
Your inherited investments will be held in a brokerage account in the name of your loved one who died.
To transfer those investments into an account in your name, you will need to take two steps:
1.lOpen up a brokerage account, if you don’t already have one.
You can open up this account at the broker of your choice. This account should be free to open and should not have any associated fees if it is not managed by a professional advisor.
Generally, I advise that people go with a broker where they already hold accounts, to reduce logistical headache. For example, if your 401(k) account is held at Fidelity the easiest and simplest option may be to set up a brokerage account there.
2. Transfer inherited investments into your own brokerage account.
The process to make this transfer can be simple or extremely complex, depending on the parties involved. It may also be handled by someone else if you are not the executor, personal representative, or trustee of your loved one’s estate/trust.
At the most basic level, transferring these securities will require a copy of your loved one’s death certificate and submitting a transfer form to the broker who currently holds your inherited investments. These forms vary, but will always include information about yourself, the decedent, and the account where funds will be transferred.
5 steps you NEED to take after inheriting investments
Once your inherited investments are transferred into your name, you can start learning what you own and deciding what you want to do with your inherited investments.
2. Understand the companies and funds you own as part of your inherited investments
Your next step is to do some research on the companies and funds you own to determine if they are:
Stocks
Bonds
Mutual funds
ETFs
What to do if your inherited investments include stocks:
Stocks are an individual share of ownership in a publicly traded company. If you inherited stocks, you’ll want to do more research on the companies you own. Consider:
Do you want to own stock in this company?
Does this stock pay dividends?
Do you have a concentrated position in a single stock?
What is my cost basis in this stock?
What to do if your inherited investments include bonds:
Bonds represent a liability issued by a corporation, government or other entity. If you own a bond, you own a note that the issuer has promised to pay back at a set interest rate. Depending on the issuer, bonds may not be subject to Federal or State income tax. Consider:
Who issued these bonds?’
What is the value, duration, and coupon payment on these bonds?
Is there a capital gain or loss in these bonds?
Is interest from these bonds taxable at the Federal or State level?
What to do if your inherited investments include mutual funds:
Mutual funds are a collection of individual securities or funds rolled up into one ownership vehicle. If you own a mutual fund, you own small pieces of each of the underlying securities held in the fund. Mutual funds are often tax-inefficient and may have high fees. Consider:
Are mutual funds from a reputable fund company?
What are the embedded fees in these mutual funds?
Will these mutual funds make large capital gain distributions at year-end?
What is my cost basis in these mutual funds?
What to do if your inherited investments include ETFs:
ETFs are similar to mutual funds in that they are often a collection of individual securities or funds rolled up into one ownership vehicle. Most ETFs track an underlying index, like the S&P 500. Unlike mutual funds, ETFs tend to have low fees and are relatively tax-efficient. Consider:
Are these ETFs from a reputable fund company?
What index or strategy do these ETFs track?
What is the fee on these ETFs?
3. Understand the tax implications of your inherited investments
Most inheritors will receive a step-up in basis on inherited investments: your cost basis will be “stepped up” to the inherited investment’s value as of the decedent’s date of death.
If you received a step-up in basis on inherited investments, selling those assets will generally not result in a large tax bill.
If you did not receive a step-up in basis (if you inherited assets through an irrevocable trust) you need to consider the cost basis of your inherited investments before making decisions.
Inheritors should also consider the underlying tax characteristics of their inherited investments. While stocks, bonds, and ETFs tend to be relatively tax-efficient, mutual funds can create an incredible tax burden that needs to be evaluated before moving forward.
Note: Inheriting investments in an IRA is different than inheriting investments in a taxable brokerage account
If you inherited investments in an IRA or 401(k) account, rather than in a taxable brokerage account, most of this advice does not apply. Assets sold within tax-advantaged retirement accounts are not taxed at sale, you are free to rebalance these accounts without tax consequences.
Most beneficiaries will have to fully empty that account within 10 years of the decedent’s date of death. Some beneficiaries may also be responsible for taking Required Minimum Distributions (RMDs). All of these distributions will be fully taxable as ordinary income.
“Aligning your investments with your values is a key part of building a plan for investing inherited assets.
Consider the tenets that guide your life and inform your other investment decisions. Do you support war? Are you fighting to mitigate the effects of climate change? Do you donate to organizations that fight bigotry, racism, sexism, discrimination, et cetera?
Whatever is important to you, your investments shouldn’t be working against your values.”
4. Decide which inherited investments you want to keep and which you want to sell
Once you understand your inherited investments, the next step is to decide which investments you want to keep and which you want to sell.
In most cases, inheritors choose to rebalance their investment accounts and sell out of inherited positions. This is because:
It is unlikely you and the deceased person had the same investment philosophy, time horizon, and risk tolerance profile. If this is the case, keeping inherited assets exactly as they were invested could be a detriment to your long-term financial goals.
Often, wealthy families will hold on to concentrated positions in a single stock or mutual fund to receive the step-up in basis at death. The intention is for their heirs to sell those positions once they can be liquidated with minimal tax impact. If you receive a concentrated position in a single stock or fund, it is generally advisable to diversify out of at least some of that position.
Younger people and older people tend to want different things from their investment portfolios. Often, I see inheritors who complicated investments. Think: accounts holding dozens or hundreds of individual stocks, technical and/or high-fee mutual funds, individual bonds, or leveraged investments. Younger inheritors will want to simplify these accounts to make their portfolio management simpler and more efficient.
5. Align your inherited investments with your long-term financial goals
After deciding which inherited investments you want to keep and which you want to sell, your next step is to sell and rebalance your portfolio to bring your inherited investments in line with your long-term financial goals.
If you’re struggling with this process and don’t know how to get to this step or what to do once you’re here, please reach out! My exclusive focus is on wealth management for inheritance and I’d love to chat about how I can help you navigate this process.
If you’re ready to DIY, consider the following when building a plan to align inherited investments with your long-term financial goals:
Life Goals
What do you want to accomplish in life in the short, medium, and long term? How will your investments help you get there?
Answering these questions is a key part of aligning inherited investments with your long-term financial goals. Segment your inheritance so that your wealth is invested and will be available when you need it.
For example, if you’re looking to buy a house in the next few years and will need a large down payment, that money shouldn’t be invested in the stock market. It should be in a high-yield savings account where it can earn interest while protected from market fluctuations.
In contrast, money you won’t need for decades should be fully invested in the market to take advantage of compound interest.
Values
Aligning your investments with your values is a key part of building a plan for investing inherited assets.
Consider the tenets that guide your life and inform your other investment decisions. Do you support war? Are you fighting to mitigate the effects of climate change? Do you donate to organizations that fight bigotry, racism, sexism, discrimination, et cetera?
Whatever is important to you, your investments shouldn’t be working against your values.
Working with a financial advisor for inheritance who helps inheritors align their wealth with their values both on and off Wall Street, can help you reach this goal if you don’t know where to get started.
Time Horizon & Risk Tolerance
When considering how to invest your long-term funds, you’ll need to consider your time horizon and risk tolerance. Someone who expects to retire in 5 years and start taking income from their portfolio may want more conservative investments than someone who won’t be taking portfolio withdrawals for 30+ years.
The other key piece of establishing your personal risk tolerance is understanding how you will emotionally react to market swings. The most successful way to grow wealth in the stock market over the long term is to buy and hold investments for decades.
If you panic when your portfolio is down 20, 30, or even 50% and sell out of your investments, you are doing yourself an incredible disservice. Your portfolio should be conservative enough that you won’t be tempted to sell out of your investments in a market trough.
Diversification
Diversification across company size (small, medium, large, and mega-cap companies), sector of the economy, and location is an essential part of building long-term wealth.
Many US investors have an overweight to large companies in the US. This is due both to home bias and to the fact that US companies, especially large US companies, have been performing extremely well over the past 10+ years.
Failing to appropriately diversify your portfolio across company size, sector, and location puts you at a disadvantage when the market cycle inevitably shifts to preference companies in a different asset class or country.
Let’s take the next step together
Understanding what to do after inheriting investments 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 Inheritance Terms You Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a fiduciary, fee-only financial planner to learn how Sunnybranch can help you build a plan to manage, grow, and protect your inherited investments.
