Stock inheritance question
 

So, my friend (no, really) recently inherited a large amount of shares of two blue chip stocks. She wants to diversify these stocks, but has run into an issue regarding taxes. I don't know the tax laws enough to offer a good answer, so I'm reaching out to the Pelican brain trust for input...

If I understand this correctly, if she sells any of these shares, she has to pay capital gains tax on the profits (current value minus purchase value). However, she does not know what the price of the stock was when it was originally purchased.

The questions:
So how does she calculate how much tax to pay when she sells shares? Does she use the value of the stock on the day she inherited the stocks as the starting point?
If she reinvests in the market, does she still have to pay the capital gains tax?
What other options does she have?

Thanks guys...

Here is my understanding of how this works. If the stocks were in an inherited IRA, then she won’t pay capital gain tax now if she sells. If they were not in an IRA, the cost basis of the stock will be reset to the date of the family members death.I think this is termed as “stepping up the basis”. I’m sure others can explain this better than me.

She should really be visiting with an estate lawyer or CPA. My license lapsed many years ago. I believe the basis goes back to the date the person who gifted her the assets passed but that may be impacted by whether they were held in a trust. I don't believe there is any way to avoid taxes when sold. Stocks are not treated like real estate for like kind exchanges which can be used to defer taxes.

She is in discussion with her financial advisor who she trusts, but as they say, "Trust, but verify..." ;)
She's just looking for more input. And she knows that taxes have to be paid on the stocks, but she wasn't clear on where the starting point is.

Thanks for the input guys. Very useful, and will help her ask the right questions, and make the right decisions.

Obviously she needs to retain a good CPA and estate planner. She will have to pay some taxes, but boo hoo, she just inherited a hunk of cash. Yea, the deceased paid taxes on the income before investing it, and now she has to pay more taxes on top of the other taxes. Uncle always wants to be part of any money moved around.

Give me all the money you want, I will pay the taxes on it with a smile. It sucks to have to give the money to the government to waste on some pointless boondoggle, but it is the law. Hire a good CPA, and the taxes can be avoided, but not evasion!.

Inherited assets get a stepped up tax basis to the date of death. Her basis in the stock is the date of death value. She will realize a gain or loss on the difference between the date of death value and the value she sells at. 26 USC 1014(a).

This is why we have CPAs.

Do you know where are they held? Inherited IRA only tax is the annual RMD so she is can reallocate without creating an additional tax liability.

She uses the value of stocks on date of death as her basis.
Yes, if she reinvests she'll pay cap gains on any gains post date of death.

She might want to do this now, as there's a good chance the current administration will eliminate the basis step up for some taxpayers. It may not apply to those that already inherited, but you never know...

I'm in sort of the same dilemma. I have stock that I started buying 30 years back.
It has been held by three diff financial services in that time period.

I've asked about what my tax obligation will be when selling and the answer I get is..."they will determine your cost."
It will be interesting...I used payroll deduction to buy shares every week.

Then was this part of an Employee Stock Purchase plan? Typically you get a discount - say 15% off market price. Pretty sure that discounted amount is also taxable. (Disclaimer - not a CPA.)

^^^ No...just a simple payroll weekly deduction for a set amount. The cheaper the shares...the more were bought.

For inherited stock that is not in an IRA, the step cost basis is the average price of the stock on the date of death. BTDT twice in the past 8 years. You can go to Yahoo Finance and look up historical stock prices.

Tell her NOT to diversify. They are doing well. Don't rush into anything. The first person had some investing know how and did well for her.