To divide inherited stocks, the executor follows the split laid out in the will, trust, or beneficiary designation, gathers the paperwork the brokerage requires, and either transfers the shares in kind to each heir’s account or sells them and distributes cash. Federal law then gives most heirs a stepped-up basis that resets each stock’s cost to its value on the date of death, which erases the capital gains that built up during the original owner’s lifetime. The tax picture changes if the shares sit inside a retirement account, and the transfer path changes if the account had a transfer-on-death designation.
Who Gets What: Per Stirpes and Per Capita
The account documents set the math. Per stirpes divides the estate along family branches. If the decedent had three children and one died before the inheritance, that child’s one-third share drops down to their own children, who split it among themselves. The two surviving siblings still get one-third each.
Per capita divides equally among all living members of a designated group. When one member has already died, their share is absorbed by the survivors rather than passing to their descendants. The living beneficiaries each receive a larger slice, and the deceased member’s children get nothing from that allocation.
Brokerage firms apply whichever method the account documents specify. Executors have no discretion to override the designation.
When Shares Skip Probate
If the original owner registered the account with a transfer-on-death (TOD) designation, the shares pass directly to the named beneficiary. The beneficiary contacts the brokerage, provides a death certificate, and the shares move over. Every state has adopted some version of the law enabling TOD registration for securities accounts.
A TOD designation overrides the will for those particular shares. If the will names one person and the TOD form names someone else, the TOD beneficiary wins. That’s worth checking after a divorce, remarriage, or birth of a child.
Documents the Brokerage Will Require
Before any shares move, the estate or transitions department at the brokerage needs a specific package. Missing one item stalls the transfer for weeks.
- Certified death certificate. An original or certified copy, not a photocopy.
- Letters Testamentary or Letters of Administration. Issued by the probate court to prove the executor’s authority. The court seal has to be visible, and many firms reject letters older than 60 days.
- Affidavit of Domicile. A sworn statement of where the decedent permanently lived, which keeps more than one state from claiming a right to tax the same assets.
- Final account statement. Identifies every holding and sets the baseline for what gets distributed.
- Firm-specific transfer forms. Sometimes called an Inherited Securities Task form or Non-Probate Transfer form. These require Social Security numbers for every beneficiary, the decedent’s account numbers, and the intended percentage for each heir.
The executor signs, and some firms want the beneficiaries to sign as well. Assemble everything before making first contact with the brokerage.
Moving the Shares
The executor’s signature on the transfer forms needs a Medallion Signature Guarantee. This is a specialized stamp issued by a participating bank, credit union, or broker-dealer, and it makes the guaranteeing institution financially liable if the signature turns out to be forged.1U.S. Securities and Exchange Commission. Medallion Signature Guarantees: Preventing the Unauthorized Transfer of Securities Not every branch of every bank participates, so call ahead.
Completed packages usually go to the brokerage’s estate department by certified mail. Some firms now accept secure digital uploads, which shortens the timeline.
In-Kind Transfer or Liquidation
The executor decides whether to move the actual shares into each heir’s account or sell everything and distribute cash. An in-kind transfer keeps the positions intact and avoids a taxable sale by the estate. Liquidation means the brokerage sells at market and distributes proceeds. When the will doesn’t specify, the executor weighs the beneficiaries’ preferences and whether the portfolio divides cleanly by percentage.
Odd-lot problems are common. When heirs are entitled to equal value but the holdings don’t divide evenly, the executor may combine share transfers with small cash payments to equalize, or liquidate a portion of the portfolio to make the math work.
Recipient Accounts
Each heir needs somewhere for the shares to land. For a regular brokerage account, that’s a new individual brokerage account. For retirement assets, it’s an Inherited IRA. After the brokerage verifies the paperwork, shares usually appear in the new accounts within a few weeks, and each heir then has full control to sell, hold, or move the assets.
Dividends During Probate
Stocks keep paying while the estate is being settled. Any dividends paid after the date of death belong to the estate, not the heirs, until distribution. If the estate’s gross income reaches $600 or more in a tax year, the executor files Form 1041.2Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators The income is taxed to either the estate or a beneficiary who receives a distribution that year, but not both. Once the shares are distributed, future dividends belong to the heir who received them.
The Stepped-Up Basis
The stepped-up basis is the single most valuable tax feature of inherited stock. Under federal law, the cost basis resets to fair market value on the date the owner died.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your parent bought shares for $10 decades ago and they were worth $100 the day they died, your basis is $100. A sale shortly after inheritance produces little or no capital gains tax.
The brokerage typically updates records to reflect the new basis once the transfer finalizes. Verify it. Errors are common with stocks purchased decades ago from incomplete records, and they can cost thousands in overpaid tax.
Alternate Valuation Date
If the portfolio drops significantly in the months after death, the executor can elect to value the entire estate six months after the date of death instead.4Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation The election is only available if it reduces both the gross estate and the estate tax owed. Anything sold or distributed before the six-month mark is valued at the sale or distribution date. It’s all or nothing across the whole estate.
Community Property Double Step-Up
Married couples in community property states get an extra benefit. When one spouse dies, both halves of any community property stocks receive a stepped-up basis, not just the deceased spouse’s half.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent In common-law states, the surviving spouse’s half keeps its original basis. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.
Retirement Account Stocks Work Differently
Stocks inside a traditional IRA, 401(k), or similar retirement account do not get a stepped-up basis. Every dollar withdrawn is taxed as ordinary income, the same as it would have been for the original owner, because the contributions were tax-deferred going in.
A non-spouse beneficiary who inherits a traditional IRA generally has to empty the account by December 31 of the year containing the tenth anniversary of the owner’s death.5Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) A narrower group of eligible designated beneficiaries, including surviving spouses, minor children of the deceased, disabled individuals, and beneficiaries not more than ten years younger than the deceased, can stretch distributions over their own life expectancy. For everyone else, the ten-year clock starts running immediately.
Inherited Roth IRAs follow similar timing rules, but distributions come out tax-free if the original Roth had been open at least five years. There’s no traditional stepped-up basis because there’s no taxable gain to step up; the growth simply passes without income tax.
Selling Inherited Stock
Inherited stock automatically qualifies as long-term regardless of how long anyone actually held it, which means the lower long-term capital gains rates apply from day one. For 2026, long-term capital gains rates for single filers are:
- 0% on taxable income up to $49,450
- 15% on taxable income from $49,451 to $545,500
- 20% on taxable income above $545,500
Married couples filing jointly get wider brackets: 0% up to $98,900, 15% up to $613,700, and 20% above that. The gain from an inherited-stock sale stacks with other income when finding the bracket.
An additional 3.8% Net Investment Income Tax applies to capital gains when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Those thresholds are not adjusted for inflation.
The Wash Sale Trap
If you sell inherited stock at a loss and buy substantially identical shares within 30 days before or after the sale, the IRS disallows the loss. The disallowed amount gets added to the basis of the replacement shares. To claim the loss and stay invested in the same company, wait at least 31 days to repurchase, or hold a different security in the meantime.
Executor Reporting on Large Estates
If the gross estate plus adjusted taxable gifts exceeds the basic exclusion amount for the year of death, the executor has to file Form 8971 with the IRS and furnish a Schedule A to each beneficiary showing the reported value of every asset they received.7IRS.gov. Instructions for Form 8971 and Schedule A For deaths in 2026, the basic exclusion is $15,000,000.8Internal Revenue Service. Whats New – Estate and Gift Tax The filing is due 30 days after the estate tax return (Form 706) is filed or due, whichever comes first.
For estates required to file Form 8971, beneficiaries cannot claim a basis in inherited property that exceeds the value reported on their Schedule A.9Federal Register. Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent If the executor reports a stock at $50 per share and you claim $55 when you sell, the IRS can impose a 20% accuracy-related penalty on the underpayment. Keep the Schedule A you receive and hand it to your tax preparer when you eventually sell.