Inherited Stock: What To Do When Inheriting Trust-Held Stock
Inherited stock has unique tax rules that can significantly impact how much you keep and owe. Factors like the stock’s value at the time of inheritance, how long it’s held, and your tax bracket all influence what the IRS expects from you.
Knowing how these rules work will help you evaluate your inherited stock’s actual cost and potential opportunity.
How do you transfer inherited stock?
Before focusing on stock held in a trust, let’s briefly discuss stock received from a trust. The transfer process involves several steps.
First, the trust’s trustee should ascertain the cost basis. Generally, the stock’s value at the time of the original owner’s death will apply, also known as the ‘stepped-up’ basis. Once the value is determined, the trustee can transfer the stock to the beneficiary by stock certificates or electronically transfer the shares to the beneficiary’s brokerage account.
Selling the stock may trigger capital gains tax, depending on the difference between the sale price and the cost or stepped-up basis. A stock will generate a capital gain if it appreciates from its cost basis. If it has lost value, it generates a capital loss. Accurate establishment and cost basis tracking are critical; you must report that information to the Internal Revenue Service (IRS).
Tax implications of inherited stock
Typically, beneficiaries are not directly responsible for paying taxes. Instead, the trust’s income, including any dividends or capital gains from the stock, is generally subject to income tax. The tax treatment depends on the type of trust, the cost basis of the inherited stock, and the timing of the inheritance. To mitigate your tax burden, you may consider selling the stock to take advantage of tax exemptions or lower tax rates.
Navigating disputes and distributions
If multiple beneficiaries cannot agree on distributing the stock, flag the issue promptly.
Resolving conflicts requires careful examination of the trust’s terms and the grantor’s intentions. If the trust document is unambiguous, it can be a source of truth to guide everyone to a good place. Still, ambiguity can amplify stock distribution disagreements, which may lead to the need for mediation or, potentially, legal action.
A comprehensive understanding of your inherited stock — its historical performance, potential risks, or benefits — will help you better decide how to manage it.
Work with a trustee to manage inherited stock effectively. A trustee can provide expertise in navigating the complexities of stock ownership, including handling paperwork, managing transactions, and ensuring compliance with legal and regulatory requirements. They can also coordinate with tax advisors and financial planners.
Incorporating inherited stock into estate planning
Think about how you wish to pass inherited stock to your heirs. For instance, you may establish a trust to give your beneficiaries greater control over managing and distributing the inherited stock. This can protect assets from potential creditors, divorce settlements, or irresponsible spending by heirs. A client of ours recently inherited stock outside of a trust structure. She now understands the risks of this and wants to ensure that her estate plan includes separate trusts for her children so that wealth stays with the family, and she can stipulate how quickly the children can access their future inheritance.
The tax implications and transfer procedures of inherited trust-held stock must be carefully navigated. Effective management involves collaboration with trustees and financial advisors, and incorporating inherited stock into estate planning.
This content is for informational and educational purposes only and should not be construed as individualized advice. For individualized advice tailored to your specific circumstances, please consult with your adviser.