The Investment Account That's One Of The Best Assets To Inherit

Inheritances are a common issue that middle-aged and young people have to grapple with. As people age, they tend to accumulate more wealth. According to Empower, a person's wealth generally increases steadily through adulthood, but often peaks in their 70s. From there, even those who live into their 90s usually don't experience a massive drop-off. This means that plenty of Americans will leave something of financial value behind for their loved ones. No matter your financial circumstances, it's always a good idea to sit down and create a will. If you die without a will, you can leave your loved ones with additional probate hurdles and perhaps even create internal strife as they decide what to do with your assets.

A will is an important tool, but it's not the only thing worth exploring. As you age, it's crucial that you begin to think about the kinds of assets you'll be leaving behind. Some accounts and property are actually problematic when wrapped up in an inheritance. Cryptocurrency, for instance, is one of the worst assets you can inherit due to potential access issues and the fact that paying taxes on it gets pretty complicated. Standard brokerage accounts, on the other hand, are surprisingly valuable. It's tempting to think that tax-advantaged retirement portfolio elements are the best assets to inherit, but a typical stock trading account is quite flexible when it comes to adding value with little downside for an inheritor.

The most important feature of a brokerage account for inheritance planning purposes is the term "step-up in basis." If you sell out of a stock position, you'll need to pay capital gains taxes on the change in value. This is a calculation based on the value of the assets when you bought them in relation to their selling price. Moreover, there's the difference between short- and long-term capital gains to consider. If you continue holding assets for the rest of your life, your beneficiaries get a unique reprieve from the potential smackdown in value growth. For example, if you invested $1,000 in Microsoft 40 years ago when it went public, your investment would have ballooned into a value of over $4 million. With stock splits considered, you'd own 288 shares valued at a cost basis of 29 cents apiece compared to a share price of roughly $500 today.

If, instead of selling, you hold your shares until you die, your beneficiaries will see the cost basis reevaluated at its price on the date of your passing. That means they can then sell the $500-per-share investment with a cost basis brought up to the current market value. Instead of paying taxes on more than $4 million of profit, a beneficiary would functionally be withdrawing funds from a savings account with little to no tax liability attached.

There's one particular investor whose example you'll want to follow if you want to incoporate this kind of strategy into your estate planning. Warren Buffett famously invests with a time horizon of "forever" attached to as many of his stock buys as possible. Buffett is a buy-and-hold investor through and through and has purchased shares in a number of companies — including American Express in 1991 — that he has not touched for decades. There are some companies that you'll invest in with a short horizon, while other buys like those of ETFs that cover a broad swath of the market might be perennial fixtures designed to accumulate value over the long term.

If you're looking to deliver value to your loved ones in the future, starting to invest in long-hold growth assets with the intention of never selling them is a great solution. With the help of the step-up in basis treatment, you could effectively transfer an exorbitant amount of wealth at low or nonexistent tax rates — even if the assets exceed the value threshold that would normally require inheritors to pay estate taxes. Attached to this strategy, though, you'll likely want to specify your intentions so that your inheritors know to sell as soon as possible. Alternatively, they might want to continue the growth and leave the accumulation of value to their own children one day.