Inherited Stocks: Should You Sell Them or Keep Them?

Inheriting shares doesn't mean you have to carry on the investment strategy of the person who owned them. They bought those shares for their own reasons, at their own stage of life. Now the money is yours, and the real question is what it should do for you.

I'd answer that in two steps. First, understand how the shares are taxed. For stock in a regular brokerage account, the tax rules often take away most of the cost of changing course. Then ask: if someone handed you this amount in cash today, how would you invest it?

A hypothetical example: a $500,000 inheritance

Suppose your mother bought shares of one company decades ago for a total of $50,000. When she dies, the shares are worth $500,000, and they pass to you in a taxable brokerage account. You already have $300,000 invested for retirement.

Step one: understand the step-up in basis

Your "basis" is the starting point used to measure your gain or loss when you sell. For most inherited property, your basis is generally the fair market value on the date of death, not what the original owner paid. That's the "step-up."

In the example, your basis is $500,000, not $50,000. The $450,000 of growth during your mother's lifetime isn't taxed as a capital gain to you. If you sold the shares shortly after inheriting them for about $500,000, your taxable gain would be close to zero.

Compare that with a gift made during her lifetime. If your mother had given you the shares while she was alive, you would generally have taken over her $50,000 basis, and selling at $500,000 would mean a $450,000 gain.

Two more points:

• Any sale counts as long-term. Inherited shares are treated as held for more than a year, even if you sell them a week after you inherit.
• Only the change after death is taxed. If the shares rise to $540,000 before you sell, your gain is $40,000. If they fall to $460,000, you have a $40,000 capital loss. And if the shares were worth less at death than your mother paid, your basis generally "steps down" to that lower value.

Why the step-up is an opportunity

This is the heart of the decision. Many people keep a large inherited position because selling feels expensive, as if they'd owe tax on decades of growth. With shares in a taxable account, that's usually not the case.

Right after you inherit, the tax cost of reshaping the position is often as low as it will ever be. For your mother, selling would have meant tax on $450,000 of gain, which may be part of why she held on. For you, that barrier is mostly gone. If the stock rises from here, new gain starts to build, and the tax reason to stay put starts to come back.

So the step-up gives you a clean moment to reconsider a concentrated investment on its merits. It doesn't mean you should sell. It means taxes probably aren't a good reason to keep a position you wouldn't choose today.

When the step-up works differently

A few situations change the math:

• Shares inside an IRA or 401(k). Inherited retirement accounts don't get a step-up. Withdrawals from an inherited traditional IRA or 401(k) are generally taxed as ordinary income, no matter what the shares inside are worth, and Roth accounts follow their own rules. Selling shares inside the account doesn't trigger tax; taking money out does. Most beneficiaries who aren't the owner's spouse must empty the account by the end of the 10th year after the year of death, and some must take annual withdrawals along the way. That calls for its own plan.
• Shares owned jointly by a married couple. When spouses own shares jointly with right of survivorship, the surviving spouse generally gets a step-up on only half the value. In community property states such as Arizona, California, Texas and Wisconsin, the whole value can generally step up when the first spouse dies.
• Shares you gave away shortly before death. If you gave appreciated shares to someone who died within a year, and the shares come back to you or your spouse, there's no step-up. Your basis is generally the same as before.

If you're not sure which of these applies, ask the executor or your tax preparer before you sell.

Step two: decide as if you were starting fresh

In the example, the inherited shares are worth $500,000 and your other investments are $300,000. One company now makes up $500,000 of $800,000, more than 60% of everything you have invested. If you had $500,000 in cash, would you put all of it in that one stock? Few people would. Yet that's exactly the position you hold if you do nothing.

That's concentration risk: one company can run into trouble that a diversified portfolio would absorb. How much of that risk makes sense for you depends on:

• Your goals and timeline. Money you'll need in the next few years, for retirement income, a home or paying off debt, calls for a different approach than money you won't touch for decades.
• What you already own. If you already have a lot riding on the same company or industry, through your job or your retirement plan, the inheritance adds to that exposure.
• Your tolerance for risk. Ask how you'd feel if this single stock fell sharply and stayed down.

You don't have to choose between keeping everything and selling everything. You can keep part of the position and diversify the rest, or sell in stages. If the shares rise before you finish, spreading sales over more than one tax year can help manage the gain.

Charity is another option. Donating inherited shares to a qualified charity may provide an income-tax deduction, subject to the usual requirements and limits. But if the shares just received a step-up in basis, there's generally little embedded gain to avoid. That makes donating the shares less advantageous relative to donating cash than it would be with long-held, highly appreciated stock.

The emotional side

Inherited shares can carry real meaning. Your parent may have worked for that company or believed in it for decades. Feeling reluctant to sell is natural. But selling isn't disloyal, and keeping the shares isn't the only way to honor the gift. Some people keep a small, symbolic position and diversify the rest, or put part of the inheritance toward something the person cared about.

Taking a few weeks to decide is fine. Just remember the price keeps moving while you wait, and any gain after the date of death is taxable when you sell.

Before you decide: a short checklist

1. Confirm what kind of account holds the shares: a taxable account, an IRA or a 401(k).
2. Get the inherited shares' reported tax basis from the brokerage firm or executor. It's usually based on their value at death, but certain estates use an alternate valuation date.
3. Check how the shares were owned (individually, jointly or as community property).
4. Work out what share of your total investments the position represents.
5. Answer the starting-fresh question for your own goals.
6. Talk to your tax preparer before you sell or withdraw anything.

If you'd like to talk through how an inheritance fits your own plan, you can reach me here.

This article is for general education only and isn't individualized investment, tax or legal advice. Tax rules change and depend on your circumstances, so talk with a tax professional before acting. The $500,000 example is hypothetical and doesn't represent any actual client or investment result.