When someone dies, the process of managing and transferring their stocks involves several steps that depend on whether the deceased had an estate plan, the type of accounts held, and applicable state laws. Here’s a detailed look at what happens to stocks when someone dies.
Estate Planning and Will
Estate Planning: If the deceased person had planned their estate, their assets, including stocks, would be distributed according to the terms outlined in their will or trust. Estate planning is crucial for ensuring that stocks and other assets go to the intended beneficiaries.
Will: A will is a legal document that details how the deceased’s assets should be distributed after their death. If the person had stocks, the will likely specifies who should receive them. Before the distribution, the will must be validated through the probate process.
Trust: If the deceased had established a trust, the trust documents guide the distribution of the stocks. Trusts can help avoid probate and often result in quicker distribution since the trust assets are handled privately according to the trust’s terms.
No Estate Plan: If the deceased did not have a will or trust, their assets will be distributed according to state intestacy laws. This means that the stocks may be distributed to immediate family members, such as a spouse or children, based on the state’s legal guidelines.
Probate Process
Probate: The probate process is the legal procedure that takes place after someone dies. It involves proving that the will is valid, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. Stocks are part of the probate estate unless they are held in accounts designed to avoid probate, such as Transfer on Death (TOD) accounts or trusts.
Executor’s Role: The executor is appointed to manage the deceased’s estate. This person is responsible for ensuring that stocks and other assets are distributed according to the will, or, if no will exists, in compliance with state law. The executor must also settle any outstanding debts or taxes before distributing assets to beneficiaries.
Transferring Stocks
Types of Accounts: The method of transferring stocks depends on how the stocks were held by the deceased.
Transfer on Death (TOD) Accounts: If the stocks were held in a TOD account, they bypass probate and transfer directly to the named beneficiaries. The beneficiary must present a death certificate and follow the brokerage firm’s procedures to claim ownership of the stocks.
Joint Accounts: Stocks held in joint accounts with rights of survivorship automatically pass to the surviving account holder. This transfer is immediate and does not require probate.
Individual Brokerage Accounts: Stocks in individual accounts must go through probate unless designated as a TOD account. The executor will work with the brokerage firm to transfer or liquidate the stocks according to the will or state laws.
Process of Transfer: To transfer stocks, the brokerage firm will require documentation such as a death certificate, letters testamentary (proving the executor’s authority), and possibly other legal paperwork. The process can take time depending on the complexity of the estate and the efficiency of the brokerage firm.
See also: What Happens When You Inherit Stocks?
Tax Considerations
Estate Taxes: The value of the deceased’s stocks will be included in the estate for tax purposes. If the estate exceeds the federal estate tax exemption ($12.92 million for individuals in 2024), estate taxes may apply. Some states also impose separate estate or inheritance taxes.
Stepped-Up Basis: When stocks are inherited, the cost basis is “stepped up” to their value on the date of the deceased’s death. This stepped-up basis can reduce the capital gains tax owed by beneficiaries if they sell the stocks later. For example, if the deceased originally bought the stock for $100,000 and it was worth $250,000 at the time of death, the beneficiary’s basis would be $250,000, potentially lowering their capital gains tax liability upon sale.
Income Tax Considerations: While the estate may be subject to taxes, the act of inheriting stocks itself is not a taxable event for the beneficiary. However, if the stocks generate dividends, capital gains, or other income after the transfer, the beneficiary will need to report that income on their personal tax returns.
Selling or Managing Stocks
Selling Stocks: Executors might sell the stocks to settle debts or distribute the cash proceeds among heirs. The stocks can be sold at the current market value, and any proceeds are added to the estate. The sale will consider the stepped-up basis for tax purposes.
Continuing Ownership: If the heirs choose to retain the stocks, they will need to transfer them into their own names. This involves updating account ownership with the brokerage firm and assuming responsibility for managing the stocks moving forward. The new owner can hold onto the stocks, sell them, or make additional investments.
Legal and Administrative Steps
Death Certificate: A certified death certificate is essential for notifying the brokerage firm and transferring or managing the deceased’s accounts. It also serves as proof of death for other financial institutions and government agencies.
Legal Advice: Dealing with stocks after a person dies can involve legal complexities, especially if there is no clear estate plan, or if there are disagreements among heirs. Executors and beneficiaries often seek legal and financial advice to ensure that they comply with estate and tax laws and to manage the stocks efficiently.
Multiple Heirs: If the stocks are to be divided among several heirs, this can be done in various ways, such as splitting the shares or liquidating them and dividing the proceeds. Legal advice may be necessary to handle these distributions, especially if disputes arise.
Conclusion
When someone dies, their stocks can be transferred to heirs or beneficiaries through the probate process or by using mechanisms like Transfer on Death accounts or joint accounts with survivorship. The distribution of stocks depends largely on whether the deceased had an estate plan and how the stocks were held. Taxes, including estate taxes and capital gains taxes, are important considerations in managing and transferring the stocks. Executors play a vital role in ensuring that the deceased’s wishes are fulfilled, while beneficiaries must navigate legal and tax responsibilities when receiving and managing their inherited stocks. Proper estate planning can simplify this process and help ensure a smooth transfer of assets.
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