Cost Basis Adjustment for Inherited Shares

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JetTodd
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Location: Seattle, WA. USA

Cost Basis Adjustment for Inherited Shares

Post by JetTodd »

Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
Geologist
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Joined: Fri Jan 02, 2009 7:35 pm

Re: Cost Basis Adjustment for Inherited Shares

Post by Geologist »

You don't really give details, but the basic statement is you don't have an option. If you inherit shares, the cost basis is adjusted (whether that is up or down).
trueblueky
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Re: Cost Basis Adjustment for Inherited Shares

Post by trueblueky »

JetTodd wrote: Wed Jan 12, 2022 8:04 pm Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
In general, there is no option. The shares' basis is reset on date of death.
See IRS Pub 551 for some nuance.
https://www.irs.gov/publications/p551
Gill
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Location: Florida

Re: Cost Basis Adjustment for Inherited Shares

Post by Gill »

I assume you’d be happy to have the basis adjusted upwards but not down. There is no such option.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
billfromct
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Re: Cost Basis Adjustment for Inherited Shares

Post by billfromct »

You would not want the higher cost basis on inherited shares because…

bill
Topic Author
JetTodd
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Joined: Thu Dec 23, 2021 3:30 pm
Location: Seattle, WA. USA

Re: Cost Basis Adjustment for Inherited Shares

Post by JetTodd »

You are all so appreciated!
When I spoke with the vanguard rep, he shared VG no longer automatically reset cost basis. I wondered why the default is now NOT to adjust. Seems a disservice.

Many of you say it’s automatic. Maybe I misunderstood, but I’m certain the person I spoke with said no, they cost basis would not be reset unless I fill out a form, called quite literally:
Cost Basis Adjustment For Inherited Shares Form

My take away is you all feel having the cost basis for funds grown in value makes sense. I’ll fill out the form.
I just know there are many nuances to miss.
Thanks so much!
vtsnowdin
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Re: Cost Basis Adjustment for Inherited Shares

Post by vtsnowdin »

Not a Vanguard customer so guessing a bit here, but the adjustment is required by IRS regulation to properly fill out your taxes, just Vanguard does not do it automatically until you fill out the IRS accepted forms. MWAG
increment
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Re: Cost Basis Adjustment for Inherited Shares

Post by increment »

The law requires that you, the taxpayer, adjust the basis when you report sales of those shares. It doesn't matter whether your brokerage does so. You may keep track of that yourself, but that is less convenient.
Geologist
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Re: Cost Basis Adjustment for Inherited Shares

Post by Geologist »

Vanguard has not always automatically reset the cost basis in the past, so perhaps not that much is new.
willyd123
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Re: Cost Basis Adjustment for Inherited Shares

Post by willyd123 »

Fair Market Value
With assets you inherit, the cost basis is usually equal to the fair market value (FMV) of the property or asset at the time of the decedent's death or when the actual transfer of assets was made.6

Fair market value is the price that property or an asset would command in the marketplace, given that there are buyers and sellers who know about the asset and that a reasonable period of time is made available for the transaction to take place.7

Alternative Valuation Date
If the value of the assets has dropped since the date of death or their transfer, the estate administrator can decide to use an alternate valuation date for the estate. This extends the valuation to six months after the date of death. Such a delay can serve to reduce the tax due on the inheritance.8

You're able to wait to find out if such a reduction occurs since you can select the alternative valuation as late as a year after the relevant tax return is due. Indeed, under estate law, the estate's value must have dropped in value by the six-month mark to choose this option; otherwise, one of the regular valuation dates must apply.
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HueyLD
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Re: Cost Basis Adjustment for Inherited Shares

Post by HueyLD »

Here are instructions from Vanguard:

“ Helpful information before starting an inheritance transfer online

Phase 1
Before the transfer

In order to complete the process online, you must:

Be inheriting an individual account, joint account (registered as “joint tenants with rights of survivorship”), traditional IRA, Roth IRA, or SEP-IRA.
Be listed by name as beneficiary on the account.
Have the full Social Security number for the person who passed away.
Have a digital copy of the death certificate.

Phase 2
Completing the transfer

While completing the transfer, you'll be asked to:

Log in (if you're a Vanguard client already) or register for online access (if you're not a Vanguard client already) by creating a username and password.
Provide information about the person who passed away. Vanguard will then attempt to verify that the person has passed away using our systems. If we're unable to, we'll ask you to upload a digital copy of the death certificate.

Creating a digital copy of the death certificate

You may be asked to upload an image or a PDF. If you need to create a digital copy, the easiest way is to take a picture of the physical document with your phone, email it to yourself, and then save it to your computer.

Phase 3
After the transfer

Once you've submitted your request, Vanguard will:

Freeze the account of the person who passed away to protect it from unauthorized activity.
Process your request and notify you once the transfer is completed.“

https://investor.vanguard.com/inheriting-accounts
Navillus1968
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Re: Cost Basis Adjustment for Inherited Shares

Post by Navillus1968 »

JetTodd wrote: Wed Jan 12, 2022 8:04 pm Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
Somewhat OT, since this apparently doesn't apply to the OP's case, but there *is* a situation where inheriting with a cost basis adjustment to the date of death can be a big disadvantage to the heirs.
Namely, inheritance doesn't always result in a step-UP in basis- if the asset has an unrealized capital loss, any possibility of tax loss harvesting vanishes at death due to a cost basis step-DOWN from the purchase price on the date of death.

There's always a Kitces article! https://www.kitces.com/blog/capital-los ... ble-basis/

"This basis adjustment of inherited assets at death can potentially result in losing out on the opportunity to benefit from realized capital losses, which can be used to offset capital gains and up to $3,000 ordinary income each year. However, by gifting assets prior to death, the original owner’s basis can be retained, and unrealized capital losses preserved!"

TL;DR version- If you can predict somebody's death (Terminal illness, [OT comment removed by admin LadyGeek], Red shirt on Star Trek, etc.), then gifting assets carrying an unrealized capital loss *prior* to death is smart, especially so when the recipient is a spouse.
privateID
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Re: Cost Basis Adjustment for Inherited Shares

Post by privateID »

Geologist wrote: Thu Jan 13, 2022 10:32 am Vanguard has not always automatically reset the cost basis in the past, so perhaps not that much is new.
They did when my FIL passed away in 2014.
Geologist
Posts: 1686
Joined: Fri Jan 02, 2009 7:35 pm

Re: Cost Basis Adjustment for Inherited Shares

Post by Geologist »

privateID wrote: Thu Jan 13, 2022 6:20 pm
Geologist wrote: Thu Jan 13, 2022 10:32 am Vanguard has not always automatically reset the cost basis in the past, so perhaps not that much is new.
They did when my FIL passed away in 2014.
That may be and it happened automatically once for an estate I was involved with, but I was posting from another personal experience. The basis was not updated. I suppose I could say that in the end, the shares were uncovered (it happened in 2008) so there was no issue with the IRS, but blanket statements that they always do or did are not correct.
Gill
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Location: Florida

Re: Cost Basis Adjustment for Inherited Shares

Post by Gill »

Navillus1968 wrote: Thu Jan 13, 2022 6:13 pm
JetTodd wrote: Wed Jan 12, 2022 8:04 pm Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
Somewhat OT, since this apparently doesn't apply to the OP's case, but there *is* a situation where inheriting with a cost basis adjustment to the date of death can be a big disadvantage to the heirs.
Namely, inheritance doesn't always result in a step-UP in basis- if the asset has an unrealized capital loss, any possibility of tax loss harvesting vanishes at death due to a cost basis step-DOWN from the purchase price on the date of death.

There's always a Kitces article! https://www.kitces.com/blog/capital-los ... ble-basis/

"This basis adjustment of inherited assets at death can potentially result in losing out on the opportunity to benefit from realized capital losses, which can be used to offset capital gains and up to $3,000 ordinary income each year. However, by gifting assets prior to death, the original owner’s basis can be retained, and unrealized capital losses preserved!"

TL;DR version- If you can predict somebody's death (Terminal illness, [OT comment removed by admin LadyGeek], Red shirt on Star Trek, etc.), then gifting assets carrying an unrealized capital loss *prior* to death is smart, especially so when the recipient is a spouse.
This is incorrect. Giving assets held at a loss transfers donor’s basis for purposes of gain BUT the fair market value at the date of the gift becomes the donee’s basis for loss purposes. In other words, you can’t give away losses.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
JetTodd
Posts: 8
Joined: Thu Dec 23, 2021 3:30 pm
Location: Seattle, WA. USA

Re: Cost Basis Adjustment for Inherited Shares

Post by JetTodd »

Navillus1968 wrote: Thu Jan 13, 2022 6:13 pm
JetTodd wrote: Wed Jan 12, 2022 8:04 pm Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
Somewhat OT, since this apparently doesn't apply to the OP's case, but there *is* a situation where inheriting with a cost basis adjustment to the date of death can be a big disadvantage to the heirs.
Namely, inheritance doesn't always result in a step-UP in basis- if the asset has an unrealized capital loss, any possibility of tax loss harvesting vanishes at death due to a cost basis step-DOWN from the purchase price on the date of death.

There's always a Kitces article! https://www.kitces.com/blog/capital-los ... ble-basis/

"This basis adjustment of inherited assets at death can potentially result in losing out on the opportunity to benefit from realized capital losses, which can be used to offset capital gains and up to $3,000 ordinary income each year. However, by gifting assets prior to death, the original owner’s basis can be retained, and unrealized capital losses preserved!"

TL;DR version- If you can predict somebody's death (Terminal illness, [OT comment removed by admin LadyGeek], Red shirt on Star Trek, etc.), then gifting assets carrying an unrealized capital loss *prior* to death is smart, especially so when the recipient is a spouse.
Navillus, this is exactly what I was looking for. I knew I’d read or heard there was a reason. Luckily there was a gain here. I also appreciate the heads up as we do have a terminally Ill family member where the latter suggestion is appropriate. Thank you!!!
Topic Author
JetTodd
Posts: 8
Joined: Thu Dec 23, 2021 3:30 pm
Location: Seattle, WA. USA

Re: Cost Basis Adjustment for Inherited Shares

Post by JetTodd »

HueyLD wrote: Thu Jan 13, 2022 10:55 am Here are instructions from Vanguard:

“ Helpful information before starting an inheritance transfer online

Phase 1
Before the transfer

In order to complete the process online, you must:

Be inheriting an individual account, joint account (registered as “joint tenants with rights of survivorship”), traditional IRA, Roth IRA, or SEP-IRA.
Be listed by name as beneficiary on the account.
Have the full Social Security number for the person who passed away.
Have a digital copy of the death certificate.

Phase 2
Completing the transfer

While completing the transfer, you'll be asked to:

Log in (if you're a Vanguard client already) or register for online access (if you're not a Vanguard client already) by creating a username and password.
Provide information about the person who passed away. Vanguard will then attempt to verify that the person has passed away using our systems. If we're unable to, we'll ask you to upload a digital copy of the death certificate.

Creating a digital copy of the death certificate

You may be asked to upload an image or a PDF. If you need to create a digital copy, the easiest way is to take a picture of the physical document with your phone, email it to yourself, and then save it to your computer.

Phase 3
After the transfer

Once you've submitted your request, Vanguard will:

Freeze the account of the person who passed away to protect it from unauthorized activity.
Process your request and notify you once the transfer is completed.“

https://investor.vanguard.com/inheriting-accounts
HueyLD. This is a big help if anyone else needs the info. I’m exhaling that I’ve already done all of these steps. Amazing how much is to be done post-mortem even with plenty of planning.
Navillus1968
Posts: 40
Joined: Mon Feb 22, 2021 6:00 pm

Re: Cost Basis Adjustment for Inherited Shares

Post by Navillus1968 »

Gill wrote: Thu Jan 13, 2022 6:49 pm
Navillus1968 wrote: Thu Jan 13, 2022 6:13 pm
JetTodd wrote: Wed Jan 12, 2022 8:04 pm Hello,
I am wondering about the options of taking vs not taking the cost basis adjustment upon inheriting shares.

I'm new to this experience! Please help.
<snip>
TL;DR version- If you can predict somebody's death (Terminal illness, [OT comment removed by admin LadyGeek], Red shirt on Star Trek, etc.), then gifting assets carrying an unrealized capital loss *prior* to death is smart, especially so when the recipient is a spouse.
This is incorrect. Giving assets held at a loss transfers donor’s basis for purposes of gain BUT the fair market value at the date of the gift becomes the donee’s basis for loss purposes. In other words, you can’t give away losses.
Gill
Hi Gill,
Unlike you, I am not a lawyer/CPA/etc., but I think you may be over-generalizing.

From the linked article- "if one spouse transfers an asset with an unrealized loss to the other spouse, the receiving spouse has only one basis – the original spouse’s basis – and the full unrealized capital loss can be preserved."

Also from the linked article- "The treatment afforded to non-spouse individuals gifted investments with a capital loss is not nearly as strong as the treatment when the same asset is gifted as separate property to a spouse. More specifically, for purposes of claiming a future capital loss, it makes no difference to a non-spouse individual whether they receive an asset with an unrealized loss as a gift or as a bequest upon the death of the owner. In either case, they will ‘only’ be able to claim a capital loss for additional losses incurred after their receipt of the asset"
[NB- I think this non-spouse case is what you were referring to.]

More- "But on the capital gains side of things, it’s a different story. In essence, by gifting an asset with an unrealized loss to a non-spouse individual, the recipient is able to earn back the original owner’s unrealized loss tax-free (because for capital gains purposes, the recipient’s basis remains the owner’s initial basis). By contrast, if the same individual were to die and leave the same asset to the same non-spouse individual, the asset would be stepped down in basis, and all future gain would be subject to capital gains tax!"

Thus, based on my vast knowledge stemming from reading one article on the internet (LOL)- if the donee is your spouse, you *can* give away losses.

If the donee is NOT your spouse, then things get complicated, but you have 2 possibilities, both positive:
1. Ability to realize tax-free gains on post-gift growth that stays *below* the donor's basis, or
2. Ability to claim a capital loss for additional losses incurred *after* the gift.

Simply inheriting at a stepped down basis provides neither of these benefits.

Half a loaf, as we say.
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