What to Do With Investments You Inherit

When you hear you're receiving an inheritance, it's natural to make plans for the money. But what do you do when you inherit investment accounts from a loved one?

Before you make a plan to liquidate those assets to cash, it helps to understand how inheriting investments works and the different steps you'll need to take to move those assets into your name.

The steps below will help you navigate this process -- and understand your options for the investments once they're legally in your name.

Transfer account ownership

Inheriting an investment account is different from other common types of inheritances, such as being the beneficiary of a bank account. Where you'll likely just get a check from your loved one's estate for your share of what's in the bank, inheriting an investment account means you'll first have to take steps to move that investment into your name before you can do anything with the assets.

After you find out that you're inheriting an investment account, your first step is to contact the account custodian. The custodian is the entity that holds the account1 and ensures its safekeeping and that all necessary IRS regulations are met. You'll likely inherit either a taxable investment account or a tax-advantaged retirement account such as an IRA, SEPIRA, or 401(k).

If you're the beneficiary of a taxable account, the estate's trustee or executor may contact the account custodian on your behalf to begin the transfer process.

However, the process is different if you're the beneficiary of a retirement account — such as a SEP-IRA, IRA, or 401(k). These retirement investment accounts transfer outside of probate, so you will need to contact the account custodian directly.

In all cases, the custodian will need proof of a person's authority to act on behalf of the estate (no matter if you're a beneficiary, trustee, or executor) and a copy of the death certificate to begin the transfer process.

Decide what to do with the investments

In general, you have three options once the inherited investment account is in your name. You can:

Keep the investments and let them grow

You might choose to keep the inherited investments intact and let them grow if:

• You like the investments and want to see how they continue to perform.

• You plan on using the funds to supplement your retirement savings in the future.

• You want to avoid potential tax implications from liquidating the investments and taking the cash.

Liquidate the investments and invest in different investments

If you want to use your inheritance to stay in the market, you might choose to sell your inherited investments and choose new ones if:

• You're a savvy investor who wants to make their own investment options.

• You have a moral or ethical concern about the investments you inherited.

• You prefer to move the money to a custodian that doesn't offer the same type of investments, such as a custodian that doesn't offer exchange traded funds (ETFs) or individual stocks.