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Investing, Estate Planning and Your Heirs

The money you plan to pass on as an inheritance needs to be invested differently

Separate account? If this description fits your situation, you may want to set up an entirely different investment account to separate the money you expect to need from the money that's likely to be passed down. This may simplify your investing, but it's not essential. Instead, you can simply change your overall investment diversification to increase the percentage you allocate to investments with strong long-term growth potential. 

Tax matters. The tax rules favor buying and holding individual stock investments, since taxes aren't due until the stocks are sold. Those who inherit stocks receive the so-called stepped-up basis, which is usually the cost basis as of the benefactor's date of death. For example, someone inherits stock that had a cost basis of $4,000. But the date-of-death value of the shares is $10,000, which becomes the cost basis for the heir. Thus, passing on low-cost-basis stock can be very advantageous to your heirs.

Preferred investments. If you inherited low-basis stocks from your parents or other family members, chances are they were shares of well-known blue chip companies. That was wise investment and estate planning. Using individual stocks for the portion of your investments that will be earmarked for inheritance is still a good thing to do, but you might also consider exchange-traded funds (ETFs) that invest in blue chip and other stock sectors like small-company and foreign stocks. Many ETFs are designed to pass on little if any capital gains. So as long as they're held (and they have gains), you receive the same tax benefits as holding individual stocks.

All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser regarding your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.

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