Your Investments: Cleaning up an inherited portfolio
Children often refuse to make changes to a portfolio that they received as an inheritance, which leads to missed investment opportunities.
Money Photo: Thinkstock
“If it was good enough for my father, it’s good enough for me.” I can’t tell you
how often I hear that line when speaking with someone who has received an
Children often refuse to make changes to a portfolio that
they received as an inheritance. Very often, this is due to sentimental reasons;
the last connection that they have to the deceased. Sometimes it’s a feeling
that since the parent left the child so much money, they must have known what
they were doing vis-à-vis investing – so, who is the child to make any changes?
When a new client who received an inheritance seven years ago opened up an
account with me, we sat down to review his current holdings and discus the
portfolio. Some of the client’s stocks were showing large losses. It turns out
that the parent had decided to move a big chunk of his portfolio into bank
stocks back in 2003.
The child received the inheritance after the
father’s passing in 2005, but felt that he shouldn’t make any changes to the
portfolio. Fast forward to 2012 and many of those bank stocks are trading at a
fraction of what they were seven years ago.
I asked him why he never made
any changes to the portfolio and he explained that since he had received them as
an inheritance, he felt awkward about selling them. He felt a certain attachment
to them and didn’t think they should be sold. He then admitted that such
emotions were not a great way to base investments, and he decided to wait for
them to move back up to the price for which his deceased father had bought
Then, he would sell them.
Needless to say, he may be in
store for a very long wait.
You are not 90
In addition to the previous
case, another common scenario is someone receives an inherited portfolio where
the investments are geared for someone who is living off fixed income, or is
wealthy enough that certain investments are made for tax-efficiency
I sat with someone in his late 20’s who received a substantial
amount of money from his grandmother who recently passed away. She was in her
mid 90’s and her portfolio was invested solely in tax-free municipal bond mutual
funds, and Israel bonds.
Now, that happened to be a smart investment
approach for her, but her twenty-something grandson, who is in university
getting an advanced degree, has no real need for tax-free income because he has
no income to speak of and therefore doesn’t pay any taxes.
He also has
little need for Israel bonds that pay virtually zero interest and provide no
After all she bought the bonds to support Israel;
he lives in Israel. He has his whole life ahead of him and the portfolio should
match his goals and needs, not his grandmother’s, now that it’s his
Due to tax rules, individuals who receive an inherited
portfolio are able to sell what’s in it and start from scratch. This is because
of what’s known as a “step-up” in cost basis.
Amy Feldman, in a Reuters
“Money” article explains, “Typically, if you sell a financial asset at a gain,
you’ll owe capital gains tax on the amount you made; the current rate on
long-term gains is 15%. But if you’ve inherited assets, you get to take
advantage of what’s known as the ‘step-up in basis.’ “That means that the
‘basis’ of whatever you’ve inherited [that is, the amount at which it’s valued
for tax purposes] resets on the date you received it. The result is that if you
sell, you won’t owe any taxes on the gains that may have built up over years, or
decades, of ownership before you inherited it.”
This gives you the
ability to figure out your goals and then create a portfolio that fits your
Feldman quotes Scott Hanson, a senior partner and
founding principal of Hanson McClain, a Sacramento-based financial advisory firm,
with $1.3 billion under management who says, “When you inherit assets, it’s a
good time to be selling things. You’ve got a fantastic opportunity to liquidate
the portfolio, avoid any taxes, and build it back as you want.”
a good chance that the relative that left money for you as an inheritance would
like you to gain from it. Speak with your financial adviser to see if your
inherited portfolio matches your investment goals and whether it is invested in
an efficient manner.
firstname.lastname@example.org Aaron Katsman is a
licensed financial adviser in Israel and the United States who helps people with
US investment accounts.