Cost basis step up on death of spouse?

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Richard1580
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Cost basis step up on death of spouse?

Post by Richard1580 » Tue Nov 05, 2019 5:22 pm

I was reading an article in the WSJ blog section https://blogs.wsj.com/experts/2018/10/2 ... important/ when I ran across this line:

"Finally, suppose a taxable account is jointly owned by a husband and wife. The husband dies. The cost bases of the assets are stepped up to their market values at his date of death."

Is this true? I have never heard of this. I understand that this happens with inherited securities, but was not aware that it applied to securities held jointly by a married couple. Something else to file away in the "In the event of my death" folder.

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Re: Cost basis step up on death of spouse?

Post by retired@50 » Tue Nov 05, 2019 5:27 pm

Richard1580 wrote:
Tue Nov 05, 2019 5:22 pm
I was reading an article in the WSJ blog section https://blogs.wsj.com/experts/2018/10/2 ... important/ when I ran across this line:

"Finally, suppose a taxable account is jointly owned by a husband and wife. The husband dies. The cost bases of the assets are stepped up to their market values at his date of death."

Is this true? I have never heard of this. I understand that this happens with inherited securities, but was not aware that it applied to securities held jointly by a married couple. Something else to file away in the "In the event of my death" folder.
Yes it's true. As I understand it, the surviving spouse has the same benefit as any inheritor. Regards,

RubyTuesday
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Re: Cost basis step up on death of spouse?

Post by RubyTuesday » Tue Nov 05, 2019 5:27 pm

the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis

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Ged
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Re: Cost basis step up on death of spouse?

Post by Ged » Tue Nov 05, 2019 5:32 pm

Typically the tax basis of the spouse's half of the property is stepped up.

It also depends on the details of the ownership; whether it is community property etc.

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Re: Cost basis step up on death of spouse?

Post by BL » Tue Nov 05, 2019 5:33 pm

RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.

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Re: Cost basis step up on death of spouse?

Post by MN-Investor » Tue Nov 05, 2019 5:45 pm

Absolutely.

My sweetie passed away in 2018. I didn't give a thought to the step up in basis until I reported DH's death to one of the investment firms. They updated the basis of the two mutual funds I owned there so that the new basis was 1/2 original (my basis) and 1/2 the value on DH's date of death. That was my ah-ha moment. I've since notified my other investment firms so that they could update the basis of my other holdings. For one stock, of which we had a significant position, that changed the average basis from $2.03/share to $31.52/share.
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Re: Cost basis step up on death of spouse?

Post by Richard1580 » Tue Nov 05, 2019 5:45 pm

Thanks to everyone for the link to the Wiki. Since we do not live in a community property state (Indiana), the step up will be 1/2, but that is good to know.

I never cease to be amazed that no matter how much I think I know, there is so much more to learn. :-)

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Re: Cost basis step up on death of spouse?

Post by Kevin M » Tue Nov 05, 2019 6:04 pm

BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

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Re: Cost basis step up on death of spouse?

Post by RickBoglehead » Tue Nov 05, 2019 6:12 pm

MN-Investor wrote:
Tue Nov 05, 2019 5:45 pm
Absolutely.

My sweetie passed away in 2018. I didn't give a thought to the step up in basis until I reported DH's death to one of the investment firms. They updated the basis of the two mutual funds I owned there so that the new basis was 1/2 original (my basis) and 1/2 the value on DH's date of death. That was my ah-ha moment. I've since notified my other investment firms so that they could update the basis of my other holdings. For one stock, of which we had a significant position, that changed the average basis from $2.03/share to $31.52/share.
Didn't the firms question this in 2018? Or had you not contacted them about the loss of your spouse?

Edit - never mind, I see you said when you reported.

To the OP, when the owner of a joint account passes away, the surviving spouse "inherits" the deceased's half ownership. Inheritance just like a child inheriting from a parent.
Last edited by RickBoglehead on Tue Nov 05, 2019 6:15 pm, edited 1 time in total.
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Re: Cost basis step up on death of spouse?

Post by RubyTuesday » Tue Nov 05, 2019 6:12 pm

Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

Kevin
Something about all of this seems off to me... not your post Kevin, just the difference in step-up between community property state and state without community property ownership.

For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?

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Re: Cost basis step up on death of spouse?

Post by Kevin M » Tue Nov 05, 2019 6:26 pm

RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

Kevin
Something about all of this seems off to me... not your post Kevin, just the difference in step-up between community property state and state without community property ownership.

For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
Good question. There are many other differences as well. In a CP state, all assets acquired while married are considered equally owned by the spouses, with some exceptions such as inheritances and gifts. This generally is not the case In common law states.

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Re: Cost basis step up on death of spouse?

Post by Hector » Tue Nov 05, 2019 6:29 pm

For community property state, what if account is not joint account?

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Re: Cost basis step up on death of spouse?

Post by Kevin M » Tue Nov 05, 2019 6:44 pm

Hector wrote:
Tue Nov 05, 2019 6:29 pm
For community property state, what if account is not joint account?
If the property is acquired during marriage, not by gift or inheritance, it is presumed to be community property. Leaving the titling of real estate aside, I think that even if you hold community property in an individual account, it's still community property. If you hold property acquired before marriage, by gift or by inheritance in an individual account, it is separate property. If the separate property is commingled in a joint account at any point, it might be problematical to maintain that is separate property (e.g., in a divorce).

However, IANAL.

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Re: Cost basis step up on death of spouse?

Post by RubyTuesday » Tue Nov 05, 2019 7:00 pm

i’ve just read some interesting material on all of this. Apparently with only a few exceptions (e.g. IRAs), state law determines ownership of property even though this ends up with community property being federally taxed differently (e.g. capital gains basis) than separate property.

Of course, there are other considerations of community property (subject to reach of creditors for partner’s liabilities, which are presumably community liabilities...)

That notwithstanding, I wonder if some folks consider domiciling in community property state and converting separate property to community property for better tax treatment on death.

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Re: Cost basis step up on death of spouse?

Post by delamer » Tue Nov 05, 2019 7:08 pm

RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

Kevin
Something about all of this seems off to me... not your post Kevin, just the difference in step-up between community property state and state without community property ownership.

For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
I was about to post a comment to this effect, but you beat me to it.

As one of the “slobs in states without community property,” I see no reason for us to be disadvantaged this way at the federal level.

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Re: Cost basis step up on death of spouse?

Post by Hector » Tue Nov 05, 2019 7:42 pm

Kevin M wrote:
Tue Nov 05, 2019 6:44 pm
Hector wrote:
Tue Nov 05, 2019 6:29 pm
For community property state, what if account is not joint account?
If the property is acquired during marriage, not by gift or inheritance, it is presumed to be community property. Leaving the titling of real estate aside, I think that even if you hold community property in an individual account, it's still community property. If you hold property acquired before marriage, by gift or by inheritance in an individual account, it is separate property. If the separate property is commingled in a joint account at any point, it might be problematical to maintain that is separate property (e.g., in a divorce).

However, IANAL.

Kevin
Thanks

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Re: Cost basis step up on death of spouse?

Post by Big Dog » Tue Nov 05, 2019 8:26 pm

delamer wrote:
Tue Nov 05, 2019 7:08 pm
RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

Kevin
Something about all of this seems off to me... not your post Kevin, just the difference in step-up between community property state and state without community property ownership.

For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
I was about to post a comment to this effect, but you beat me to it.

As one of the “slobs in states without community property,” I see no reason for us to be disadvantaged this way at the federal level.
Community property is another legal way to hold legal title to assets, like tenants in common or joint tenants. The fact that your state does not recognize community property ownership is not the IRS's problema. btw: there are only ~9 community property states, so you are not alone.

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Re: Cost basis step up on death of spouse?

Post by FIREchief » Tue Nov 05, 2019 9:40 pm

I lived in a community property state and I looked into this quite a bit a few years ago. I believe that I found references to cases where the IRS accepted a signed community property "declaration" as sufficient to allow 100% step up in basis upon death of the first spouse (regardless of how an institution might otherwise title an account).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Cost basis step up on death of spouse?

Post by Eric » Tue Nov 05, 2019 9:52 pm

Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
in a community property state, real estate must be titled as community property to get the full step-up.
This is not true in Texas. Here, all property is presumed to be community property unless proven otherwise by clear and convincing evidence. Doesn't matter whether the phrase "community property" appears anywhere in the documentation. Even property titled in one spouse's name only is presumed to be community property.

Eric

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Re: Cost basis step up on death of spouse?

Post by HueyLD » Wed Nov 06, 2019 2:44 am

Eric wrote:
Tue Nov 05, 2019 9:52 pm
This is not true in Texas. Here, all property is presumed to be community property unless proven otherwise by clear and convincing evidence. Doesn't matter whether the phrase "community property" appears anywhere in the documentation. Even property titled in one spouse's name only is presumed to be community property.
O.k.

So, if a property is owned by one spouse before marriage and continues to be solely owned by that spouse after marriage, it should be presumed to be a separate property, right?

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Re: Cost basis step up on death of spouse?

Post by Eric » Wed Nov 06, 2019 8:56 am

HueyLD wrote:
Wed Nov 06, 2019 2:44 am
So, if a property is owned by one spouse before marriage and continues to be solely owned by that spouse after marriage, it should be presumed to be a separate property, right?
If you can prove it was owned before marriage, then yes, it’s that spouse’s separate property. For real estate, usually you can provide the necessary proof with public records (recorded deeds). For personal property, like stocks, bonds, and mutual funds, it can be more difficult. You may need an unbroken chain of financial statements from the month before marriage through the month of death or divorce, so you can trace the current assets back to their source. If there has been a lot of trading, the accounting can get complicated. Also, because Texas (unlike California) treats income from separate property as community, reinvestment of dividends and interest can further complicate the analysis.

(There are further complications even for real estate if community funds are used to benefit the property or pay down mortgage debt during the marriage, but this post is already messy enough!)

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Re: Cost basis step up on death of spouse?

Post by Eric » Wed Nov 06, 2019 9:55 am

RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
delamer wrote:
Tue Nov 05, 2019 7:08 pm
As one of the “slobs in states without community property,” I see no reason for us to be disadvantaged this way at the federal level.
Ironically, the current rule was adopted to correct an inequity that ran the other way.

Think back a hundred years, when men were the primary (or sole) earners, most property was held in the man's name alone, and husbands usually died before their wives. (The last is still mostly true, though perhaps less strongly so now.) In those circumstances, when a married man died in a community property state, half of the property got a new basis. By contrast, when a married man died in a non-community-property state, all of the property got a new basis. The current rule "fixed" that, putting married couples in both states in the same tax position.

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Re: Cost basis step up on death of spouse?

Post by mptfan » Wed Nov 06, 2019 10:29 am

RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
The answer to the first question is no. The answer to the second question is because ownership of property is defined based on the law of the state in which you live, and to the extent that federal tax law is computed based on property ownership it follows state law.

Is it fair that two unmarried people who live together pay a different amount of federal income tax compared to two married people with the same income who live together and file joint income taxes? What about someone who gets paid as an independent contractor for doing the same job with the same income that someone else does but gets paid as an employee? Shouldn't all tax payers be treated equally?

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Re: Cost basis step up on death of spouse?

Post by MathIsMyWayr » Wed Nov 06, 2019 10:36 am

Kevin M wrote:
Tue Nov 05, 2019 6:44 pm
Hector wrote:
Tue Nov 05, 2019 6:29 pm
For community property state, what if account is not joint account?
If the property is acquired during marriage, not by gift or inheritance, it is presumed to be community property. Leaving the titling of real estate aside, I think that even if you hold community property in an individual account, it's still community property. If you hold property acquired before marriage, by gift or by inheritance in an individual account, it is separate property. If the separate property is commingled in a joint account at any point, it might be problematical to maintain that is separate property (e.g., in a divorce).

However, IANAL.

Kevin
Some properties are titled under an individual and I am not sure whether the ownership may be changed easily. Examples are company stocks acquired through ESPP and RSU after marriage. Are they also stepped up in a community property state?

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Re: Cost basis step up on death of spouse?

Post by Eric » Wed Nov 06, 2019 10:44 am

MathIsMyWayr wrote:
Wed Nov 06, 2019 10:36 am
Some properties are titled under an individual and I am not sure whether the ownership may be changed easily. Examples are company stocks acquired through ESPP and RSU after marriage. Are they also stepped up in a community property state?
Folks, classifying property as community or separate is state-specific and we need to be careful about general comments. In Texas, the way stock (or other property) is titled generally doesn't matter for this purpose. You look to other factors, like how and when the property was acquired, to determine whether it is separate or community. In your example, if the stock was received as employee compensation during marriage, it would generally be community property even if titled solely in the earner's name.

Note also that in this example, the stock might not get a step-up of any amount (whole or half) regardless of its status as community or separate. If the stock hasn't been taxed yet -- maybe it hasn't vested or is otherwise restricted in a way that postpones the tax -- then generally it will not get a step-up.

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Re: Cost basis step up on death of spouse?

Post by MathIsMyWayr » Wed Nov 06, 2019 11:13 am

Eric wrote:
Wed Nov 06, 2019 10:44 am
MathIsMyWayr wrote:
Wed Nov 06, 2019 10:36 am
Some properties are titled under an individual and I am not sure whether the ownership may be changed easily. Examples are company stocks acquired through ESPP and RSU after marriage. Are they also stepped up in a community property state?
Folks, classifying property as community or separate is state-specific and we need to be careful about general comments. In Texas, the way stock (or other property) is titled generally doesn't matter for this purpose. You look to other factors, like how and when the property was acquired, to determine whether it is separate or community. In your example, if the stock was received as employee compensation during marriage, it would generally be community property even if titled solely in the earner's name.

Note also that in this example, the stock might not get a step-up of any amount (whole or half) regardless of its status as community or separate. If the stock hasn't been taxed yet -- maybe it hasn't vested or is otherwise restricted in a way that postpones the tax -- then generally it will not get a step-up.
It is a common sense that RUS's were already vested and taxes paid as usual. RSU has no value until vested. ESPP is also usually acquired with after-tax money, but the discount on the purchase is yet to be taxed. In other words, the tax basis exists in both cases.

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Re: Cost basis step up on death of spouse?

Post by scophreak » Wed Nov 06, 2019 11:26 am

MathIsMyWayr wrote:
Wed Nov 06, 2019 11:13 am
Eric wrote:
Wed Nov 06, 2019 10:44 am
MathIsMyWayr wrote:
Wed Nov 06, 2019 10:36 am
Some properties are titled under an individual and I am not sure whether the ownership may be changed easily. Examples are company stocks acquired through ESPP and RSU after marriage. Are they also stepped up in a community property state?
Folks, classifying property as community or separate is state-specific and we need to be careful about general comments. In Texas, the way stock (or other property) is titled generally doesn't matter for this purpose. You look to other factors, like how and when the property was acquired, to determine whether it is separate or community. In your example, if the stock was received as employee compensation during marriage, it would generally be community property even if titled solely in the earner's name.

Note also that in this example, the stock might not get a step-up of any amount (whole or half) regardless of its status as community or separate. If the stock hasn't been taxed yet -- maybe it hasn't vested or is otherwise restricted in a way that postpones the tax -- then generally it will not get a step-up.
It is a common sense that RUS's were already vested and taxes paid as usual. RSU has no value until vested. ESPP is also usually acquired with after-tax money, but the discount on the purchase is yet to be taxed. In other words, the tax basis exists in both cases.
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Re: Cost basis step up on death of spouse?

Post by 1210sda » Wed Nov 06, 2019 11:37 am

Eric wrote:
Tue Nov 05, 2019 9:52 pm
Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
in a community property state, real estate must be titled as community property to get the full step-up.
This is not true in Texas. Here, all property is presumed to be community property unless proven otherwise by clear and convincing evidence. Doesn't matter whether the phrase "community property" appears anywhere in the documentation. Even property titled in one spouse's name only is presumed to be community property.

Eric
Eric, once again you step in and bring clarity to a complex situation.

Thanks so much.

1210

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Re: Cost basis step up on death of spouse?

Post by Nowizard » Wed Nov 06, 2019 12:01 pm

Would this also apply if assets were in a Revocable Trust with the married couple being primary beneficiaries?

Tim

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Re: Cost basis step up on death of spouse?

Post by MN-Investor » Wed Nov 06, 2019 12:13 pm

Nowizard wrote:
Wed Nov 06, 2019 12:01 pm
Would this also apply if assets were in a Revocable Trust with the married couple being primary beneficiaries?

Tim
I think that, for the most part, a revocable trust with both spouses as grantors and beneficiaries is most similar to owning property jointly.

I actually passed this question by my estate lawyer after my sweetie passed away. In 2012 I did a net unrealized appreciation transfer of stock from my 401(k) into a taxable brokerage account held in our revocable trust's name. After my husband passed away, I asked my lawyer about a step up in basis for that stock based on 1/2 belonging to my husband since it was held in the trust. He assured me that we could make a very good argument for that step up in basis since, from our wedding 40+ years ago, we have always held all property in joint name.
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Re: Cost basis step up on death of spouse?

Post by Kevin M » Wed Nov 06, 2019 12:52 pm

Nowizard wrote:
Wed Nov 06, 2019 12:01 pm
Would this also apply if assets were in a Revocable Trust with the married couple being primary beneficiaries?

Tim
Typically the trust will have language that property transferred into the trust retains its original character.

Both separate and shared property, including community property, can be transferred to the trust. Community property held by a trust gets a full step up in basis when one spouse dies in a community property state, and the deceased spouse's share gets the step-up in common law states; i.e, no difference than if the property was not in a trust. This is according to the NOLO Press book Make Your Own Living Trust.

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Re: Cost basis step up on death of spouse?

Post by inbox788 » Wed Nov 06, 2019 1:52 pm

Richard1580 wrote:
Tue Nov 05, 2019 5:22 pm
Something else to file away in the "In the event of my death" folder.
I've thought about this, and I've been planning to include additional instructions for actions to be taken. I've read that it's a good idea to get an appraisal for documentation. Some have suggested saving some online appraisals and comps, but I'm not sure that's sufficient. Other say a professional electronic (computer search, no physical visit) appraisal may be sufficient, but I haven't come across many online.

https://www.doughroller.net/tools-resou ... bors-home/

I've also thought about the consequences of passing on the half to an adult child at the time of first parent passing (vs. all at second), but that seems to be a very complicated question involving sequence, titling, and cost basis adjustments.

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4nursebee
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Re: Cost basis step up on death of spouse?

Post by 4nursebee » Thu Nov 07, 2019 1:43 am

I tried to find if my state was a joint tenancy or community property state for cost basis step up.
My internet search yields lots of divorce law firms.
Is there an easy source to find this info?
Might a link be added to the wiki?
Thank you.
4nursebee

Luckywon
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Re: Cost basis step up on death of spouse?

Post by Luckywon » Thu Nov 07, 2019 1:58 am

Could someone confirm that the following is correct:

Suppose Tom in California is married and has kept a non retirement account with inherited stocks separate from community property. Suppose then that his wife Mary becomes terminally ill. If Tom made his previously separate property community property before Mary's death, he would get a step-up in basis? If this is true, what are the acceptable ways to make it community property? Transfer to a joint account? Retitle the account? Make some sort of legal declaration that it is community property?

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Re: Cost basis step up on death of spouse?

Post by Pacific » Thu Nov 07, 2019 2:14 am

Not to hijack this informative thread, but what happens with the basis if both Husband and Wife live overseas?

inbox788
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Re: Cost basis step up on death of spouse?

Post by inbox788 » Thu Nov 07, 2019 2:41 am

4nursebee wrote:
Thu Nov 07, 2019 1:43 am
I tried to find if my state was a joint tenancy or community property state for cost basis step up.
My internet search yields lots of divorce law firms.
Is there an easy source to find this info?
You can lookup your state. Looks like these 9: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
https://en.wikipedia.org/wiki/Community ... ted_States

Also, how is the property titled? What does the deed and property documents say? I think you can have it either way when available, though I'm not clear on the differences. I'm still trying to figure out if there is any cost basis adjustment or property tax appraisal/adjustment in the various titling differences.

https://apeopleschoice.com/difference-b ... vivorship/

I read this many times, and I'm still unclear when what's taxed and what gets a step up basis.
Taxes on Profits
One main difference between property held as a joint tenancy and property held as community property with right of survivorship is the manner in which profits from the sale of jointly-held property is taxed. Generally, property held as community property with right of survivorship has tax advantages over a joint tenancy. In a joint tenancy, when one spouse sells property that was held jointly prior to the death of the other spouse, a portion of the profit is subject to capital gains tax. Whereas, community property with right of survivorship is not subject to capital gains tax when sold.
https://info.legalzoom.com/difference-b ... 21133.html

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Eric
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Re: Cost basis step up on death of spouse?

Post by Eric » Thu Nov 07, 2019 8:13 am

inbox788 wrote:
Thu Nov 07, 2019 2:41 am
Also, how is the property titled?
I realize I am asking you to trust the information of one lawyer Boglehead (me) over what you are reading in LegalZoom and the other DIY resources referenced in this thread. All I can tell you is that in Texas, what you are reading (and repeating here) is wrong. The way property is registered does not have the significance here that you are describing. You can identify property as “joint tenants with right of survivorship” in Texas and still have it be community property. (Whether you have validly created a survivorship right is a separate question — you have to follow certain steps -- but it can certainly be community property, and in fact is presumed to be community property absent very compelling evidence to the contrary.)
Last edited by Eric on Thu Nov 07, 2019 8:29 am, edited 1 time in total.

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HueyLD
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Re: Cost basis step up on death of spouse?

Post by HueyLD » Thu Nov 07, 2019 8:22 am

I would like to thank Eric for his very insightful and helpful posts.

He emphasized one very important point: each state has its unique sets of law even among community property states. Folks need to seek competent legal advice from attorneys in their own state especially when large amounts of assets are involved.

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Richard1580
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Re: Cost basis step up on death of spouse?

Post by Richard1580 » Thu Nov 07, 2019 9:22 am

HueyLD wrote:
Thu Nov 07, 2019 8:22 am
I would like to thank Eric for his very insightful and helpful posts.

He emphasized one very important point: each state has its unique sets of law even among community property states. Folks need to seek competent legal advice from attorneys in their own state especially when large amounts of assets are involved.
+1. That has certainly been my take from the discussion. Thanks to Eric for his insights.

inbox788
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Re: Cost basis step up on death of spouse?

Post by inbox788 » Thu Nov 07, 2019 11:25 am

Eric wrote:
Thu Nov 07, 2019 8:13 am
inbox788 wrote:
Thu Nov 07, 2019 2:41 am
Also, how is the property titled?
I realize I am asking you to trust the information of one lawyer Boglehead (me) over what you are reading in LegalZoom and the other DIY resources referenced in this thread. All I can tell you is that in Texas, what you are reading (and repeating here) is wrong. The way property is registered does not have the significance here that you are describing. You can identify property as “joint tenants with right of survivorship” in Texas and still have it be community property. (Whether you have validly created a survivorship right is a separate question — you have to follow certain steps -- but it can certainly be community property, and in fact is presumed to be community property absent very compelling evidence to the contrary.)
INAL, so I'll I'll defer to experts on this subject. Thanks for sharing your expertise and experience. You're many steps ahead of me and some other folks here.

When information is unclear (as in the passage I was trying to understand) or conflicting, I just want to know what I'd need (or spouse) to provide the for the IRS audit or the (probate) court, or my accountant/lawyer, whatever the titling or local state treatment. So far all I have is update the deed, and what seems to be a good suggestion to get an appraisal after the death of a spouse. It can be many years later when time comes to sell it, and that's when you discover what you wish you had done differently when the spouse passed or even originally bought the property.

I still don't see the difference either way when it come to cost basis. The differences seem to be more relevant if divorce comes in the picture and if there inheritors other than the spouse.
https://www.prater-ridleylaw.com/Articl ... exas.shtml

And, as far as a taxable brokerage account, what documentation should be saved to protect and facilitate the step up basis?

I'm seeking an answer to what I thought was a simple situation of 2 older parents who want an adult child to inherit their home (and brokerage account), and what's the best way to title and transfer these assets. Turns out it's not so simple, and everything else is far, far more complicated.

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FIREchief
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Re: Cost basis step up on death of spouse?

Post by FIREchief » Thu Nov 07, 2019 4:27 pm

Eric wrote:
Thu Nov 07, 2019 8:13 am
inbox788 wrote:
Thu Nov 07, 2019 2:41 am
Also, how is the property titled?
The way property is registered does not have the significance here that you are describing. You can identify property as “joint tenants with right of survivorship” in Texas and still have it be community property. (Whether you have validly created a survivorship right is a separate question — you have to follow certain steps -- but it can certainly be community property, and in fact is presumed to be community property absent very compelling evidence to the contrary.)
Thanks for posting this Eric. This is consistent with my understanding of how this works. For those who live in community property states, it may also be cheap insurance to have an estate attorney include a community property declaration in a person's estate planning documents. I've read that the IRS has historically accepted these as sufficient evidence to support 100% step up in basis. See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Cost basis step up on death of spouse?

Post by protagonist » Thu Nov 07, 2019 4:38 pm

Kevin M wrote:
Tue Nov 05, 2019 6:26 pm
RubyTuesday wrote:
Tue Nov 05, 2019 6:12 pm
Kevin M wrote:
Tue Nov 05, 2019 6:04 pm
BL wrote:
Tue Nov 05, 2019 5:33 pm
RubyTuesday wrote:
Tue Nov 05, 2019 5:27 pm
the wiki has a good description of step up in basis
https://www.bogleheads.org/wiki/Step-up_in_basis
Yes, read the Wiki.
It depends on whether you live in a community property state or not.
Community property is fully stepped up, but in other states, only 1/2 receives a step-up.
Does not apply to OP, but in a community property state, real estate must be titled as community property to get the full step-up. If husband and wife hold property as joint tenants, only the deceased spouse's share gets the step-up. However, I believe you can draft a statement that all property is held as community property, regardless of how it's titled, and that will allow the full step-up on property held as joint tenants.

Kevin
Something about all of this seems off to me... not your post Kevin, just the difference in step-up between community property state and state without community property ownership.

For federal tax purposes, shouldn’t all tax payers be treated equally? Why would it be ok for people in community property states to have full step up in basis and slobs in states without community property be stuck with 1/2 step up?
Good question. There are many other differences as well. In a CP state, all assets acquired while married are considered equally owned by the spouses, with some exceptions such as inheritances and gifts. This generally is not the case In common law states.

Kevin
Consider the case where, at the time of marriage, the partner with the most assets is the older one and thus likely to die sooner.
Would it then make sense, for the sake of inheritance, to continue to maintain separate accounts, in which case the younger spouse would inherit 100% fully stepped up? Since it was owned prior to marriage (with appreciation following marriage) it would not be considered "community property" even in a CP state? Whereas if it was transferred to joint ownership at marriage only half would be subject to step up?

I assume that anything inherited by children or anybody other than a spouse would be subject to 100% step up, correct?

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Kevin M
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Re: Cost basis step up on death of spouse?

Post by Kevin M » Thu Nov 07, 2019 6:03 pm

protagonist wrote:
Thu Nov 07, 2019 4:38 pm
Consider the case where, at the time of marriage, the partner with the most assets is the older one and thus likely to die sooner.
Would it then make sense, for the sake of inheritance, to continue to maintain separate accounts, in which case the younger spouse would inherit 100% fully stepped up?
If there was a good reason, the older one could retain his or her separate property in individual accounts. Future potential basis step up is only one consideration.

In a CP state at least (what I mostly think about as a CA resident), maintaining it as separate property protects it from the spouse in case of divorce (in general, the lawyers can chime in with exceptions if they want). It also enables the older spouse to gift the assets to anyone he or she wants, for example children from a previous marriage, without the other spouse's consent.

In a CP state, any additional property acquired by either spouse, other than by gift or inheritance (and possibly other ways that are dependent on the state, like interest and dividends), would be community property. So there could very well be a combination of separate property and community property. Most of my property is my separate property, and most of my wife's property is her separate property, but my wife and I bought a house together and hold that in a living trust as community property.

Assuming older spouse dies first, the basis of his or her property would be stepped up (or down) regardless of who inherits it, and regardless of whether or not it was separate property or community property.

One potential advantage of converting to community property in a CP state would be a potential step up in basis if the younger spouse died first. As the lawyers may point out, this may be dependent on the laws of the particular CP state in question.
protagonist wrote:
Thu Nov 07, 2019 4:38 pm
Since it was owned prior to marriage (with appreciation following marriage) it would not be considered "community property" even in a CP state?
I believe this is generally correct, as long as it was not commingled with community property at any point.
protagonist wrote:
Thu Nov 07, 2019 4:38 pm
Whereas if it was transferred to joint ownership at marriage only half would be subject to step up?
In a CP state, it would all be stepped up, as long as there were no titling issues in states where that could be an issue, for example CA (but according to Eric, not TX).
I assume that anything inherited by children or anybody other than a spouse would be subject to 100% step up, correct?
In a CP state, step up (or down) of 100%, regardless of who inherits it, spouse, children, or anybody else, again, assuming no titling issues in CP states where that matters.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

inbox788
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Re: Cost basis step up on death of spouse?

Post by inbox788 » Thu Nov 07, 2019 6:33 pm

protagonist wrote:
Thu Nov 07, 2019 4:38 pm
Consider the case where, at the time of marriage, the partner with the most assets is the older one and thus likely to die sooner.
Would it then make sense, for the sake of inheritance, to continue to maintain separate accounts, in which case the younger spouse would inherit 100% fully stepped up? Since it was owned prior to marriage (with appreciation following marriage) it would not be considered "community property" even in a CP state? Whereas if it was transferred to joint ownership at marriage only half would be subject to step up?

I assume that anything inherited by children or anybody other than a spouse would be subject to 100% step up, correct?
What happens if the less likely outcome occurs and there is no step up basis? You need a hedge or contingency plan. If nothing gets sold until the children inherit it after the second passing, it may be irrelevant.

Came across something called an estate valuation report that reports the valuation on the day a person died. Does Vanguard or other brokerages provide this online? Or via request?

Update: Answering my own question. Found Balances and Holdings -- Balances by Date that seems to do the trick. You can create and Account Valuation Report (date within 7 years)

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