When someone passes away, the stocks and other assets he owned become the property of his heirs. If you inherit shares, they are yours to do with as you see fit. You may want to keep the stock if it looks like a good investment. Nevertheless, there still may be paperwork and tax consequences. These matters must be addressed even if you choose to do nothing with the shares.
When you are joint owner of stock in an account with right of survivorship, you become sole owner if the other person passes away. No action on your part is needed. Sometimes stock is held in an account with a designated beneficiary and ownership transfers automatically upon the owner's death. Typically, all the heir needs to do is provide the broker, bank or other financial institution where the account is located with personal identification and a copy of the death certificate. The account provider then transfers ownership of the stock. The heir can sell the shares, move them to another financial institution or simply keep them where they are. When stock shares are not held in an account with a named beneficiary or are held as paper stock certificates, a probate court must determine how they will be distributed. The executor of the estate takes care of transferring ownership to the heir. The heir doesn't do anything.
The monetary value of inherited stock isn't subject to income taxes. However, if the estate is large enough, the federal government and your state may impose an estate tax. As of 2013, federal estate taxes apply when an estate's value exceeds $5,250,000. Normally, any estate taxes are paid out of the estate's assets. As heir, you are responsible for paying these taxes only if they can't be paid by the estate. A few states levy an inheritance tax on property received by heirs, although the federal government does not. Inheritance taxes are paid by the heir, so you would be liable for them even if you do nothing with the shares you receive.
Some companies pay dividends to shareholders. Once you inherit shares, you receive any dividends the company pays. For example, if you are heir to 1,000 shares of stock and the company pays a $2.50-per-share dividend each year, you'll get $2,500 a year as long as you own the stock. Dividends are taxable income and you must report them and pay taxes due when you file your tax return.
Gains and Losses
You may decide to do nothing with inherited shares for years. If you eventually decide to sell them, chances are the stock's value will have changed. This means you will have a taxable gain or a tax-deductible loss for the year you sell the shares. The Internal Revenue service says to subtract your cost basis from the proceeds of the sale to find the amount of the gain or loss. When you inherit shares, the cost basis is normally the value of the shares on the date of death of the original owner. A taxable gain or loss is always long-term when the shares are inherited, regardless of how long you own them. This means the maximum tax rate for gains on inherited shares is 15 percent, as of 2013.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.