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I'm specifically referring to financial assets like stocks, bonds, index funds, etc and to people who don't need to file an estate tax return; if they do need to file a return, they're certainly not going to ask me! My general advice to my friends is normally to sell such assets immediately because

  1. the proceeds from the sale represent a riskless profit,
  2. the tax implications are usually small because the basis of such assets is normally calculated from the date of the original owner's death (IRS publication 551), although I could see how this would become complicated
  3. if you wouldn't buy the assets at that price, don't hold on to them now,
  4. you'll get the highest present value for your sale immediately because of ongoing inflation, so unless you need part of the money as an emergency fund or other immediate purpose, invest it in an inflation-protected fund or an index fund in order to decrease the amount you lose to inflation

Is this good advice in general? I normally recommend people sell these inheritances immediately and invest them in a low cost index fund or something similar assuming they don't need to pay off debt or make a capital investment of some kind (buy/upgrade a house, etc.).

One exception I see is if you plan to invest the proceeds from the sale in the same mix of securities, then there probably isn't an advantage to sell. For example, if I inherit shares in VFINX, which I was planning to invest the proceeds in anyway, there doesn't seem to be an advantage to selling the inheritance and reinvesting it in the same asset. Of course, this isn't really an exception because you would "buy the asset at the current price."

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    Arguments can be made for both sides of #4. Selling inherited assets because of a fear of inflation begs the question: what are you going to do with the proceeds? Keeping the proceeds of the sale in a sock under your mattress is far worse as a hedge against inflation than leaving the money invested in stocks and bonds where it is possible that a rising tide will lift all boats. So, it gets back to #3; if it is a good investment now, fearful as you are about inflation, then hold on to it. If something else will guard better against inflation, sell the inheritance and buy the better guard. – Dilip Sarwate Apr 15 '13 at 1:00
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    @DilipSarwate True. That's normally why my advice is to invest in a low-cost index fund, although an inflation-protected index fund would be another option. I would never put money in a sock under the mattress (or similar accounts, like a checking/savings account) unless as an emergency fund or some other situation where it needed to be as liquid as possible. – John Bensin Apr 15 '13 at 1:03
  • "I would never put money in a sock under the mattress..." Which is exactly my point. A blanket statement #4 that says "Sell now, else inflation will eat away your inherited asset", is, in my opinion, bad advice, period, because you put the fear of inflation into people but don't tell them what to do after selling the inherited asset. If you include a sure-fire inflation-proof alternative and say "Sell the inherited asset and invest the proceeds in this absolutely guaranteed 100% inflation-proof alternative; else inflation will soon reduce daddy's $500k to $50k", that's a different matter. – Dilip Sarwate Apr 15 '13 at 1:44
  • @DilipSarwate Good point. That's why I would normally recommend either an index fund or an inflation-protected fund, unless you're saving the money for emergencies. – John Bensin Apr 15 '13 at 2:11
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John - sure, your points are well taken. $500K in cash is preferable to $500K invested in a way I wouldn't choose at the moment.

A friendly warning - inheritances often come in the form of an IRA account. This comes with its own issues, and an IRA shouldn't be confused with the assets it contains. Selling the assets inside is fine, you can reinvest in what you wish, but selling and pulling the money out can result in an horrific tax bill. I was recently interviewed on the radio (and available as a Podcast) discussing Inherited IRA Tax Tips, and it's worth educating yourself as the topic is quite convoluted.

(And thanks, John, for a question that permitted me to sneak this in. I owe you a beverage)

  • In my first draft of the question, I included the phrase "financial assets in non-retirement accounts" but I forgot to include it when I revised the question, but thanks for covering that situation (since I imagine it's the most common). – John Bensin Apr 15 '13 at 0:49
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    Based on your other advice, I think it's also worth mentioning that if you intend to donate the inheritance to charity (this is the case in my personal situation), donating the money to a charitable investment fund might be a better idea than selling the assets and donating th. isn't the best idea. – John Bensin Apr 15 '13 at 0:56
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    Regarding the charitable fund. Sure, if those reasons apply, the added benefits may be worth it. What you don't get is the savings from the cap gain, since you'd transfer quickly enough for that not to impact, as assets are stepped up as you noted. – JoeTaxpayer Apr 15 '13 at 1:41

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