5 Questions to Ask a Financial Adviser About an Inherited Stock Portfolio
Inheriting a stock portfolio comes with big decisions. Before making any sudden moves, ask yourself and your adviser these questions to protect your wealth.
An inherited stock portfolio can change your life, but it often arrives at precisely the moment you're least prepared to make major financial decisions.
"Receiving an inheritance is an emotionally charged event, usually a mix of grief, guilt, gratitude and even relief, which can create a bias toward action," says Ashley Weeks, a wealth strategist at TD Wealth. "The best thing any beneficiary can do at the outset is take a beat and gather the facts."
That doesn't mean doing nothing. Some decisions can wait, while others — such as understanding the tax consequences, account rules or required distributions that apply to your inheritance — may need more immediate action. This is where a financial adviser's guidance can be golden.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"A good adviser is also there to shed light on your blind spots and fill in your knowledge gaps, while keeping you from making emotionally charged decisions that affect your finances," says Kyle Labelle, an owner at Milestone Financial Planning.
So when should you consult an adviser after receiving an inheritance? "Immediately," according to Stephanie Temporiti, wealth adviser and executive director at Hightower Signature Wealth.
"You will want to understand the requirements for any money that needs to be distributed to you by law, as well as the tax implications for selling certain stocks or taking money out of an account," she says. "A financial planner will also identify other areas that may need attention after an inheritance, such as estate planning, insurance needs, and tax planning."
Consulting an adviser immediately doesn't mean making every decision in that moment. These five questions can help you start the inheritance conversation and create a long-term plan for the portfolio you inherited.
1. What do I need to do now — and what can wait?
One of the hardest parts of receiving an inheritance is figuring out which decisions actually need your immediate attention. The good news is that not everything does.
"Making significant decisions around money is something to do when the grief wave has somewhat subsided," Temporiti says. "Sometimes it is OK to let emotions take the front seat with decision-making; money doesn't work that way."
She writes a "now, soon, later" list for her clients. "These are the things we need to accomplish immediately, in six to 12 months and beyond," she says. Having a clear action plan can help calm financial anxieties during a time when you're already dealing with plenty elsewhere in your life.
"The process of inheriting stock can feel like a paper chase initially," Weeks says. "Whether inheriting from an estate, trust, beneficiary designation, or a TOD [transfer of death] account, the recipient will need to provide documentation and there may be a waiting period for creditor claims."
Your immediate priorities may include completing the necessary paperwork, determining exactly what type of account you inherited and identifying any required distributions or deadlines that apply.
An adviser can help you identify what needs to be addressed now and which bigger financial and investment decisions can safely be put on the back burner until the emotional heat subsides.
2. What taxes will I owe, and what is my cost basis?
Death and taxes may be the only certainties in life, but the tax treatment of inherited investments isn't always straightforward.
"If there is any uncertainty, the first question to ask is how an inherited portfolio will be taxed when positions are sold or distributions are taken," Weeks says.
One of the first things to figure out after inheriting a stock portfolio is what the IRS considers your starting point, also known as the property's cost basis. This basis will determine how much capital gains you'll owe if you sell.
If you've inherited investments directly, the cost basis is generally reset to the investment's fair market value on the date of the owner's death, although an alternative date can apply if the executor of the estate elects to use one.
But not every inherited account receives the same treatment. For example, inherited investments in a tax-advantaged account such as an IRA are subject to specific inherited retirement account tax and distribution rules. Many nonspouse beneficiaries of retirement accounts must also empty the account within 10 years.
The way the inherited property reaches you can matter, too. For example, property distributed through certain trusts may receive a different basis treatment than assets included in the deceased owner's estate.
"That difference can significantly change your tax bill when you eventually sell, which is exactly why it can make sense to slow down and understand which rule applies before you act," says Labelle.
3. Does this portfolio fit my goals, time horizon and risk tolerance?
Stocks, bonds, mutual funds and/or ETFs are part of 25% of older parents' estates, a Morning Consult survey commissioned by Kiplinger found. The portfolio you inherited was built for someone else. It may have worked beautifully for them, but that doesn't mean it's right for you.
"Once the necessary documentation is provided and the tax situation is clearly understood, the recipient of an inherited portfolio can evaluate whether the specific holdings fit their financial plan and make adjustments accordingly," Weeks says.
Your age, income needs, financial goals, investment timeline and risk appetite are all unique to you. This makes asset allocation inherently personal. An adviser can look at the inheritance alongside any investments you already own to determine the best way to combine them.
You can also ask the adviser what your target allocation should look like now given your situation and goals, then compare that with the portfolio you now own.
4. Which stocks should I keep, sell or diversify — and how should I make those changes?
Even if you discover that your inherited portfolio isn't quite right for you, that doesn't mean you need to sell everything immediately. By the same token, you also don't need to keep anything simply because someone you loved chose it.
Instead, ask your adviser to evaluate each holding in the context of your whole portfolio. You may want to keep a close eye on risk level and concentration. If a large portion of your inherited portfolio is in a single company, industry or sector, a bad turn for those investments could have an outsized impact on your new finances.
One helpful way to frame the conversation can be to ask your adviser: If I had inherited cash instead of these stocks, what would you recommend I own today?
From there, you can discuss whether it makes sense to keep each investment, sell it or diversify gradually.
"Ultimately, this relationship gives you a decision-making partner who knows you, your situation and what you're hoping to accomplish," Labelle explains.
5. How does this inheritance change my overall financial plan?
Each investment you own is only one part of a larger equation. The bigger question is what the inheritance could allow you to do differently in the rest of your financial life.
"It's important to get an understanding of how an inheritance impacts your own financial picture," Temporiti says. "This allows you to be a good steward of the money you inherited and maximize its utility."
That could mean reducing or changing your work situation, paying down debt or increasing savings to pave the way for a brighter tomorrow. It may also give you the ability to help future generations or causes you care about.
"It's easy to lose sight of the fact that money is a tool — nothing more, nothing less — to achieve our highest aspirations," Temporiti says. "This is what the deceased person wanted for you: to see you do good with the money and live your life to the fullest."
Related content
- The Best Stocks to Gift Your Grandchildren
- Manage an Inheritance Like a Pro in Just Seven Steps
- How Your Inheritance Actually Gets Taxed: From Stepped-Up Basis to IRA Rules
