Investing in stocks can help you diversify your portfolio and build wealth. But what happens to stocks when you die? Stocks and other investments become part of your estate when you pass away. Who is entitled to inherit your stocks can be determined by your beneficiary designations, your will if you’ve created one or inheritance laws in your state if you die without a will in place. A financial advisor could help you put an estate plan together for your family’s needs and goals.
What Happens to Stocks When You Die?
What happens to stocks when someone passes away can depend on what provisions they made for those assets before their death. Generally, there are three ways a stock owner can prepare for the transfer of shares when they pass away:
- Add one of more beneficiaries to their investment account where the shares of stock are held
- Name a transfer on death (TOD) beneficiary
- Bequeath shares of stock to heirs in their will
If you have stocks in a brokerage account, you can name one or more individuals as beneficiaries. This means that once you pass away, your beneficiaries will inherit the brokerage account in its entirety, including any stocks you held at the time of your death.
This might be the simplest way to pass on stocks and other investments, especially if you’re married. You can name your spouse as your designated beneficiary for your brokerage account and retirement accounts to ensure that the wealth you’ve accumulated during your lifetime goes to them after you’re gone.
Transfer on Death Beneficiary
Some states recognize a special beneficiary designation known as transfer on death. When you name someone as a transfer on death beneficiary, they have no right to the assets in your investment account during your lifetime. But once you pass away, they automatically assume ownership of those assets.
As of 2022, 30 states and the District of Columbia recognize transfer on death designations:
- District of Columbia
- New Mexico
- North Dakota
- South Dakota
- West Virginia
So why would it be necessary or beneficial to use a transfer on death designation if allowed by your state? The main benefit of doing so is that transfers on death assets are not subject to probate.
Probate is a legal process in which a deceased person’s assets are inventoried, any outstanding debts are repaid by their estate and remaining assets are distributed among their heirs. The probate process can be time-consuming and costly if someone has a larger estate or there are disputes over who is entitled to inherit. A transfer on death designation allows your named beneficiary to bypass this process for stocks and other securities in your investment accounts.
Distributing Stocks in a Will
A last will and testament is a legal document that allows you to specify how you’d like your assets, including stocks and investment accounts, to be distributed among your heirs. You can leave instructions in your will for how you’d like stocks to be divided among your heirs if you haven’t already named beneficiaries or transfer on death beneficiaries for those assets.
The advantage of using a will to distribute stocks and other assets is that you have control over what happens to them. Say you own 1,000 shares of Apple stock, for example. You could choose to split those stock shares equally among your three children, leaving it up to them to decide whether to hold onto them or sell them.
If you have a will, any assets included in that will are subject to probate. There is another option for avoiding probate, which involves creating a trust. A trust is a legal arrangement in which you transfer ownership of assets to a trustee. You can act as your own trustee during your lifetime and name one or more persons to succeed you.
Trust assets are not subject to probate but a trust can be costly to maintain. Talking to your financial advisor can help you decide if establishing a trust is something worth considering. Your advisor can also discuss different types of trusts and how you might be able to use them in your estate plan.
What Happens to Stocks When You Die Without a Will?
When someone passes away without a will in place, they’re considered to be intestate. In the case of intestacy, the assets of a deceased person are distributed according to state inheritance laws.
Typically, a deceased person’s spouse has the first right of inheritance, followed by their children and then other relatives. That can be problematic if you have specific wishes in mind regarding who should get what from your stock holdings. The best way to avoid this scenario is to draft a last will and testament, either with the help of an estate planning attorney or using an online will-making software program.
What happens to stocks when you die if you have no heirs? In situations where someone dies without a will and the state is unable to find any of their heirs at law, any assets they leave behind become the property of the state. It’s still worth making a will, however, even if you don’t have any family members or friends you’d like to leave your stocks to. You could instead choose to leave them to the charity of your choice.
What to Do If You Inherit Stocks
What happens next when you inherit stocks can depend on whether the person you receive them from designated you as a beneficiary or had a will in place. If your spouse named you as a transfer on death beneficiary for their brokerage account, for example, the account would automatically become yours when they pass away.
You’d need to contact the brokerage to notify them of your spouse’s death. You may also be asked to provide certain documentation, such as a death certificate, and complete paperwork to transfer ownership of the account to yourself. The brokerage may require you to set up a new account in your name with the inherited assets. You could then designate beneficiaries of your own.
The transfer process and requirements may be similar if you were named as an heir in someone’s will and inherited stocks. In cases where there was no will, whether you inherit stocks will most likely be determined by your state’s inheritance laws. If you do inherit stocks from someone who did not have a will you may need to provide documentation from the probate court to the brokerage in order to take control of those assets.
If you invest in stocks, it’s important to think about what might happen to them once you pass away. Naming beneficiaries, setting up transfer on death designations and creating a will or trust can help ensure that your stocks aren’t stuck in limbo after you’re gone. And if you inherit stocks from someone, it’s equally important to know how to claim ownership of them so their financial legacy isn’t lost.
Estate Planning Tips
- Consider talking to a financial advisor about estate planning and what provisions you can make during your lifetime for stocks and other investments. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you inherit stocks, consider the best way to handle them. You’ll pay no capital gains tax on inherited stock shares until you sell them. All inherited stock is eligible for the more favorable long-term capital gains tax rate. Even so, it may be helpful to talk to your advisor about how to handle the sale of inherited stocks and potentially offset gains with capital losses in order to minimize your tax liability.
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