Page 1 of 1

Cost-basis step-up at death

Posted: Wed Jun 13, 2018 8:09 am
by phisher4
Hello all,

I'm getting conflicting information from by Vanguard, my CPA, and even prior boglehead threads about this issue, so I would very much appreciate the collective wisdom of the group!

The situation is straightforward: I had one joint mutual fund account with my father, and another joint account with both my father and mother. My father recently passed away and my mother (and I) are very much alive. I have paid the taxes on both accounts for years.

Can I step-up the cost basis of these accounts to the date of my father's death? If so, can I step it up 100%?

The type of joint account is JTWROS (Joint tenancy with with rights of survivorship).

Thanks everyone! Appreciate your help, as always.

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 8:56 am
by BolderBoy
phisher4 wrote:
Wed Jun 13, 2018 8:09 am
Can I step-up the cost basis of these accounts to the date of my father's death? If so, can I step it up 100%?

The type of joint account is JTWROS (Joint tenancy with with rights of survivorship).
No. If you jointly own the account you get no stepped-up basis in the value of the accounts. The pseudo-exception is spousal joint ownership in which the account passes directly to the surviving spouse.

In the situation you described, why are the accounts jointly owned? (what are you trying to accomplish?)

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 9:04 am
by bsteiner
It depends. What does the lawyer for your father's estate say?

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 5:24 pm
by phisher4
My father's estate was small and there was no lawyer. My CPA recommends a 100% step-up, which smells wrong to me, although google offers multiple opinions.

Practically speaking -- for accounts of ~500K, would the IRS care (or know) if I did things incorrectly? The total amount of stepped-up cost basis would be around 100K.

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 5:52 pm
by Alan S.
A non spouse joint tenancy registration should result in the basis adjustment being made for the portion that the decedent contributed. Most, but not all joint accounts with a parent are for accounts where the parent contributed 100% of the invested funds, and therefore 100% of the value on the DOD should receive the basis adjustment.

However, for the account where your mother is also a surviving joint tenant, only the 50% that your father was deemed to have contributed gets the basis adjustment.

Likewise, if the parent contributed the funds and added the child as a JT on a brokerage or mutual fund account, adding the child is not considered a taxable gift from the parent as long as the child does not cash in any of the assets. If the child pulls funds out of the account, that action constitutes a taxable gift. You stated that you were paying taxes on this account, does this also mean that you were receiving certain income or distributions from the account?

If you gifted shares of your own to your parents, who then passed within 1 year of your gift, then you must use your own basis for that portion. In other words, you cannot gift appreciated assets and get them back within 1 year by inheritance and get a basis step up.

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 6:00 pm
by livesoft
Alan S. wrote:
Wed Jun 13, 2018 5:52 pm
However, for the account where your mother is also a surviving joint tenant, only the 50% that your father was deemed to have contributed gets the basis adjustment.
But if there was an account where OP was not on, but was JTWROS with Mom & Dad, then the 50% vs 100% step-up would depend on the state of residence, right?

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 6:11 pm
by Gill
livesoft wrote:
Wed Jun 13, 2018 6:00 pm
Alan S. wrote:
Wed Jun 13, 2018 5:52 pm
However, for the account where your mother is also a surviving joint tenant, only the 50% that your father was deemed to have contributed gets the basis adjustment.
But if there was an account where OP was not on, but was JTWROS with Mom & Dad, then the 50% vs 100% step-up would depend on the state of residence, right?
It depends on the state to the extent there is different treatments in community states and common law states. Alan S. Has described the rules in the vast majority of states not having community property.
Gill

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 6:58 pm
by FIREchief
Gill wrote:
Wed Jun 13, 2018 6:11 pm
livesoft wrote:
Wed Jun 13, 2018 6:00 pm
Alan S. wrote:
Wed Jun 13, 2018 5:52 pm
However, for the account where your mother is also a surviving joint tenant, only the 50% that your father was deemed to have contributed gets the basis adjustment.
But if there was an account where OP was not on, but was JTWROS with Mom & Dad, then the 50% vs 100% step-up would depend on the state of residence, right?
It depends on the state to the extent there is different treatments in community states and common law states. Alan S. Has described the rules in the vast majority of states not having community property.
Gill
Right. Also, if a person does live in a community property state, it doesn't hurt to have their lawyer draft a "community property declaration" that will overlay the "JWROS" account ownership designation. I've read that the IRS might get a bit picky even in a community property state if the account doesn't have a "community property" ownership designation. Both VG and Fidelity appear to offer this, but when I checked Fidelity's a few years ago it wouldn't accomplish the desired 100% step up upon the death of either spouse. I've read that the IRS will honor a community property declaration without question.

I would be interested in hearing if anybody has had first hand experience with this in a community property state.

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 7:02 pm
by Big Dog
However, for the account where your mother is also a surviving joint tenant, only the 50% that your father was deemed to have contributed gets the basis adjustment.
A community property state gets full step-up for death of spouse. (Vanguard allows registration as Community Property, and I believe will automatically adjust the basis upon presentation of a death cert, at least that's what they told me when we changed the registration from Jt Ten.).

Re: Cost-basis step-up at death

Posted: Wed Jun 13, 2018 8:42 pm
by Alan S.
There are many cases that include multiple variations from a simple case, probably far more than the simple cases.

For example, there are account registrations that may or may not have changed the actual character of the property. There are divorces, quasi community property, different state statutes among the CP states, multiple moves between common law and CP states etc.

In most cases, my impression is that the tax authorities usually do not dispute the basis reporting for such inherited assets absent mega valuation. But that may not be the case for a disgruntled heir who is negatively affected by the characterization of separate vs community property for assets of considerable value.