03 Feb How to sell inherited stock

 Q. I inherited a bunch of stocks when my father died. I have the stocks in my name now, and I’ve held them, but I’m not sure why because I know they don’t necessarily fit in with the rest of my investments. I’ve had them for four years, and I’m thinking of selling. Are there any strategies I should use?

A. When we inherit assets from our parents, we sometimes find it hard to sell, even if it’s the smart financial thing to do.

It sounds like you need to try to keep your emotions out of it the best you can.

There are several issues to consider.

First, taxes.

When your father passed away, the securities would have received a step-up in the cost basis to his date of death, said James Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown.

“The last four years have been pretty good for stocks, so there is likely been further appreciation which would be exposed to capital gains taxes when you sell,” he said. “You should consult your accountant on how selling these stocks may affect your taxes.”

Sonneborn said recent changes to tax laws have increased the top marginal bracket on capital gains from 15 to 23.8 percent on your federal return, and that could potentially cause you to lose some of your deductions. Perhaps selling the stocks across multiple tax years could help to manage the tax impact, he said.

Next, you need to think about your investment strategy, meaning for you, you need to decide the appropriate mix of stocks and bonds for your financial goals.

You need to ask yourself what sort of investment returns you need to achieve and how much risk can you take on in the process, Sonneborn said. Once you get this figured out, you can focus on the asset classes and securities which are best suited to build this portfolio.

He said using a broadly diversified approach can help you avoid certain risks associated with holding individual stocks. To understand the exposures of your existing portfolio, he recommends you try a tool such as Morningstar’s Instant X-Ray, which provides information on asset allocation, geographic and sector exposure and investment styles.

“Knowing what you’ve got is an important step to making decisions about what investments you should be keeping and how to prioritize what to sell,” he said. “You will want to avoid overconcentrations in any one area of the markets.”

There may be opportunities that your original portfolio had been missing, and the proceeds of the inherited stock sales can help you build a better portfolio more suited to meeting your long term goals, he said.

“For an individual investor a philosophy of keeping it simple is often the best approach,” he said. “There a several well-established providers of broad index funds that can help you achieve a globally diversified portfolio with just a few simple and inexpensive investments. Wall Street firms are great at creating products that can make investing overly complicated, expensive and riskier than need be.”

Your best chances for success, Sonneborn said, are enhanced by having a focus to keep the portfolio structure simple, diversify across asset classes and geographies, and review periodically to re-balance to manage your risk exposures while keeping expenses low.

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This story was first posted in February 2015.