Today we’re going to talk about how to handle the taxation on stock that isn’t in an IRA and gets inherited. For example, let’s say someone bought 100 shares of Apple stock in 1987 and they leave it to their kids when they pass away. How are you taxed on this stock? To help us answer the question, we’ve brought on Jake Doser, a financial advisor at Johnson Brunetti.

The good news is that the recipient is in a favorable situation in this scenario because of what’s called the step-up in basis. This means that whoever inherits the stock will inherit it with a cost basis of whatever that price is at the time of inheritance. It’s one of the few benefits that the IRS provides Americans.

So let’s go back to that Apple stock example. If those 100 shares were purchased at $10 originally but the stock was worth $20 when the beneficiary received it, the IRS views it as it was purchased at $20 now. So if the beneficiary wanted to turn around and sell it immediately, they could do so and receive tax-free sale proceeds. This can be an awesome gift to provide your children or other family members.

This also brings up some important planning conversations for anyone trying to lay out their estate. By taking a proactive approach to planning, you can have control over what assets are being left to the next generation. You want to know which accounts you’re going to access in your lifetime, at what pace and for what purpose. That non-qualified account or non-IRA stock needs to be either the first place you touch or something you never touch. Since that account is typically taxed at a lower rate, you could take advantage of that if you needed to or just wait altogether and pass along that step-up in basis to your beneficiary. This requires forward thinking and a proactive approach.

The after-tax brokerage account has a number of uses beyond this one example, and if you’re able to sit down ahead of time with our team, we can explore all those different possibilities and find out how it can best help you accomplish your objectives.

Here’s some of what we discuss in this episode:

• How the step-up in basis works.

• The difference in proactive and reactive management.

• A few considerations to make in regard to taxes during income planning.

• How the brokerage account fits into the income plan for retirees.

• Why you don’t want to create a joint account with your child.