Step-up of basis on spouse’s death

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Topic Author
Zombies
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Joined: Sat Jul 15, 2017 6:22 pm

Step-up of basis on spouse’s death

Post by Zombies »

Hello —

My mother recently passed away and I’m trying to help my father get his family finances in order.

Most of their assets / house were jointly titled, but my mother had one account solely in her name with a sizable amount of equities. This was money generated by my father (not inherited) but in my mother’s sole name for emotional reasons (which my father had no problem with). My father’s CPA told him that upon her death he would receive a stepped-up basis for that account.

That sounded crazy to me, as it seems like in the case of terminal illness you would just transfer everything to that spouse’s sole name to receive the step up. However, my searching on this site and others implies that in a community property state, _all_ assets of both spouses get a step up in the event of a spouse’s death. On one hand that means you wouldn’t have the (weird, macabre) situation I described, but it also is news to me and I would love to get confirmation of that. If that’s the case, I’m still confused about why the CPA would mention that about my mother’s assets if it applied to all assets.

My father is in Maryland, and it seems like Maryland is an “equitable distribution” state instead of community property, so I’m not sure how that impacts this.

In summary:

1) Does anyone know if the equities solely in my mother’s name will receive a step-up in basis?

2) Will the remainder of assets in my parents’ joint name receive a step-up?

3) Does being in Maryland affect this either way?

Thanks!
Prudence
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Re: Step-up of basis on spouse’s death

Post by Prudence »

Just curious, did your mother's account have a beneficiary?
Davistax
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Re: Step-up of basis on spouse’s death

Post by Davistax »

Mother's account will get full step up. Joint accounts will get step up for 1/2.
Topic Author
Zombies
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Re: Step-up of basis on spouse’s death

Post by Zombies »

This would imply that in the case of terminal illness, it is advantageous to transfer assets / equities to an account of the dying spouse, resulting in the surviving spouse getting all the assets “back” but with a completely reset basis within a short time frame. That seems ... odd.
Topic Author
Zombies
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Re: Step-up of basis on spouse’s death

Post by Zombies »

Prudence wrote: Thu Oct 18, 2018 4:58 pm Just curious, did your mother's account have a beneficiary?
I don’t believe so but am not sure. What would the consequences of that be?
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Artsdoctor
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Re: Step-up of basis on spouse’s death

Post by Artsdoctor »

Zombies,

You're right. There are steps that couples can indeed take when one spouse has an expected life span much shorter than the other's.

I am not an expert here, so please bear that in mind.

First, the rules are very different when you live in a community property state (like California). When you don't live in a community property state (like Maryland), the cost basis rules are more complicated if accounts are held jointly and easier when accounts are held individually. So for anyone surfing the internet about "terminal illness spouse tax rules," make sure you know what your state characterization is.

Second, you can definitely trade assets back and forth depending on medical diagnoses. However, there are certain risks involved. For one, if the market tanks, you can actually have a stepped-down basis. For another, assets held by one spouse for less than a year might have special tax consequences (compared to assets held more than one year) if traded by the surviving spouse.

While I'm not an accountant specializing in estate management, I can speak to being a doctor though. I have definitely had tax planning scenarios with patients play out in ICUs over the course of my career, especially at the end of December. Those are conservations that are even more macabre than those above.
Prudence
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Re: Step-up of basis on spouse’s death

Post by Prudence »

Zombies wrote: Thu Oct 18, 2018 5:12 pm
Prudence wrote: Thu Oct 18, 2018 4:58 pm Just curious, did your mother's account have a beneficiary?
I don’t believe so but am not sure. What would the consequences of that be?
I don't know. Davistax says her account will get full step up. I assume your Dad would inherit the proceeds through her will.
Gill
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Re: Step-up of basis on spouse’s death

Post by Gill »

Zombies wrote: Thu Oct 18, 2018 5:11 pm This would imply that in the case of terminal illness, it is advantageous to transfer assets / equities to an account of the dying spouse, resulting in the surviving spouse getting all the assets “back” but with a completely reset basis within a short time frame. That seems ... odd.
No, this potential loophole has been plugged. If the beneficiary transferred the asset to the decedent within a year of date of death, there is no stepup.
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
Zombies
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Re: Step-up of basis on spouse’s death

Post by Zombies »

Gill wrote: Thu Oct 18, 2018 5:49 pm
Zombies wrote: Thu Oct 18, 2018 5:11 pm This would imply that in the case of terminal illness, it is advantageous to transfer assets / equities to an account of the dying spouse, resulting in the surviving spouse getting all the assets “back” but with a completely reset basis within a short time frame. That seems ... odd.
No, this potential loophole has been plugged. If the beneficiary transferred the asset to the decedent within a year of date of death, there is no stepup.
Gill
That makes a ton of sense. This is a fix from the tax law last year?

Thanks all for the replies. The account in question was transferred years ago but it’s nice to know that such a glaring loophole doesn’t exist.
Gill
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Re: Step-up of basis on spouse’s death

Post by Gill »

Zombies wrote: Thu Oct 18, 2018 6:02 pm
Gill wrote: Thu Oct 18, 2018 5:49 pm
Zombies wrote: Thu Oct 18, 2018 5:11 pm This would imply that in the case of terminal illness, it is advantageous to transfer assets / equities to an account of the dying spouse, resulting in the surviving spouse getting all the assets “back” but with a completely reset basis within a short time frame. That seems ... odd.
No, this potential loophole has been plugged. If the beneficiary transferred the asset to the decedent within a year of date of death, there is no stepup.
Gill
That makes a ton of sense. This is a fix from the tax law last year?

Thanks all for the replies. The account in question was transferred years ago but it’s nice to know that such a glaring loophole doesn’t exist.
It’s been the law as long as I can remember.
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
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Artsdoctor
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Re: Step-up of basis on spouse’s death

Post by Artsdoctor »

The one year "loop hole" has been around for a while. Although tax dodges seem to be rampant and even bragged about publicly in some circles, there are some minimal rules that have been in effect for a long time.

It sounds as if your dad's CPA is reasonable. Find out about Roth conversions since he'll be able to file as Married Filing Jointly for the year of your mom's death and income limits may be more generous than when he's filing as an Individual the following year. When my dad died, there was quite a bit of tax planning involved by my mom's CPA so I wouldn't be bashful about sitting down with his CPA and going over this.
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