Cost-basis step-up at death

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
phisher4
Posts: 135
Joined: Tue Oct 18, 2016 7:05 pm

Cost-basis step-up at death

Post 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.
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Cost-basis step-up at death

Post by BolderBoy »

phisher4 wrote: Wed Jun 13, 2018 8:09 amCan 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?)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
bsteiner
Posts: 9208
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Cost-basis step-up at death

Post by bsteiner »

It depends. What does the lawyer for your father's estate say?
Topic Author
phisher4
Posts: 135
Joined: Tue Oct 18, 2016 7:05 pm

Re: Cost-basis step-up at death

Post 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.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Cost-basis step-up at death

Post 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.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Cost-basis step-up at death

Post by livesoft »

Alan S. wrote: Wed Jun 13, 2018 5:52 pmHowever, 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?
Wiki This signature message sponsored by sscritic: Learn to fish.
Gill
Posts: 8221
Joined: Sun Mar 04, 2007 7:38 pm
Location: Florida

Re: Cost-basis step-up at death

Post by Gill »

livesoft wrote: Wed Jun 13, 2018 6:00 pm
Alan S. wrote: Wed Jun 13, 2018 5:52 pmHowever, 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
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
User avatar
FIREchief
Posts: 6916
Joined: Fri Aug 19, 2016 6:40 pm

Re: Cost-basis step-up at death

Post 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 pmHowever, 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.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Big Dog
Posts: 4608
Joined: Mon Sep 07, 2015 4:12 pm

Re: Cost-basis step-up at death

Post 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.).
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Cost-basis step-up at death

Post 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.
Shaneman
Posts: 80
Joined: Sun Apr 14, 2019 8:14 pm

Re: Cost-basis step-up at death

Post by Shaneman »

Big Dog wrote: Wed Jun 13, 2018 7:02 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.
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.).
What happens if you don't live in a community property state regarding Cost-basis step-up at death? Also instead for the death of spouse what about the death of a father? Can the children get a full step-up in cost-basis of a stock the children never contributed to in purchasing that was JTWRS if their father died?

Here is the situation.

My father past away just about 2 years ago. He lived all his life in Massachusetts which is NOT community property.

He suffered from Alzheimer's and was in Alzheimer's care facility for 3 years that he paid 100% spent up most of his assets. The family never probated his estate since the majority of his money was spent on his care. Thus there was not any estate tax return or probate inventory since his home and bank accounts were spent on his care.

There was just one stock certificate of a utility company consisting of 2000 shares (my father held the certificate in his safe deposit box).

My father had the stock registered as JTWRS in my dad's name, my name and my brother's. My father contributed 100% in buying the stock and we did not even know about it.

So my brother an I called the Shareholder Service Department at American Stock Transfer & Trust Company LLC (AST), filled out the paperwork to have the stock certificate re-issued 1000 shares in my name and 1000 shares in my brother's name.

After AST mailed me the certificate I sent it off to Merrill Lynch brokerage account since I did not want to hold the paper. I then call ML once the shares were in my account and told them they needed to enter the cost basis on the date of my father's death. ML said they couldn't do it. I then called AST and they said they could not provide ML with a cost basis.

How can I get the cost basis entered for the date of my father's death? I don't know how to prove my father purchased the stock 100% with his money.

I presently live in Massachusetts and was thinking it might be best to sell the inherited stock before I move out of state. Also if I sell the stock now just about 2 years after my father's death I was thinking if the IRS was to question the sale it might be better getting documentation verses me selling the stock 15-20 years from now and American Stock Transfer & Trust Company has no more records.
senex
Posts: 1087
Joined: Wed Dec 13, 2017 3:38 pm

Re: Cost-basis step-up at death

Post by senex »

Shaneman wrote: Fri Jan 15, 2021 10:56 am How can I get the cost basis entered for the date of my father's death? I don't know how to prove my father purchased the stock 100% with his money.
My guess (I've never tried it) is that when converting a paper stock certificate, that Merrill will record it as "we don't know the cost basis" -- same as they do for stocks bought before 2011 (or thereabouts when the requirement started). And that when you sell, the Merrill 1099 will report the sale in the box for "uncovered shares" (uncovered means the broker doesn't know the basis).

If those guesses are right, then you will provide the cost basis on your tax return, and calculate the gain yourself.
User avatar
ipdiddly
Posts: 549
Joined: Fri Jan 01, 2021 10:24 am
Location: MA

Re: Cost-basis step-up at death

Post by ipdiddly »

BolderBoy wrote: Wed Jun 13, 2018 8:56 am
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.
I'm with BolderBoy on this. I'm no expert, but when you own property jointly, you are a full fledged owner and have the right to do whatever you want with that property, even while the other joint owner is alive. As an owner before death, your cost basis should not change as a result of death. When your father added you and your brother to the stock certificate, he made a gift to you. Gifts made prior to death do not get step up basis. I can't comment on the situation where your mother is named on property.

One way to have avoided this situation is to own the shares in a brokerage account in one name - your father's name. Then name you and your brother as beneficiaries under the account. That way the account would go to both of you on death and it would get step up basis.
senex wrote: Fri Jan 15, 2021 11:19 am
My guess (I've never tried it) is that when converting a paper stock certificate, that Merrill will record it as "we don't know the cost basis" -- same as they do for stocks bought before 2011 (or thereabouts when the requirement started). And that when you sell, the Merrill 1099 will report the sale in the box for "uncovered shares" (uncovered means the broker doesn't know the basis).

If those guesses are right, then you will provide the cost basis on your tax return, and calculate the gain yourself.
I'm with Senex on this. If, in fact, the broker issues a 1099 after the sale that puts the sale in the category "cost basis not reported", then you are free to insert whatever cost basis you feel is justified or can get away with. So you might look up the stock price history and use the price for those shares on the date of death. Of course, I do not recommend doing anything that violates your conscience or the tax laws.
increment
Posts: 1735
Joined: Tue May 15, 2018 2:20 pm

Re: Cost-basis step-up at death

Post by increment »

ipdiddly wrote: Fri Jan 15, 2021 2:22 pm If, in fact, the broker issues a 1099 after the sale that puts the sale in the category "cost basis not reported", then you are free to insert whatever cost basis you feel is justified or can get away with. So you might look up the stock price history and use the price for those shares on the date of death.
Even if the broker reports a basis, you can adjust it on Form 8949 (see column (g)). In fact, probably you must adjust it if you believe that the broker is wrong.
Gill
Posts: 8221
Joined: Sun Mar 04, 2007 7:38 pm
Location: Florida

Re: Cost-basis step-up at death

Post by Gill »

ipdiddly wrote: Fri Jan 15, 2021 2:22 pm I'm no expert, but when you own property jointly, you are a full fledged owner and have the right to do whatever you want with that property, even while the other joint owner is alive. As an owner before death, your cost basis should not change as a result of death. When your father added you and your brother to the stock certificate, he made a gift to you. Gifts made prior to death do not get step up basis. I can't comment on the situation where your mother is named on property.
Are you just speculating on what the law is in this situation? Yes, the basis does change as the result of the death of the father and the entire value of the holding on date of death becomes the new basis with the date of death as the acquisition date. It is also a long term holding regardless of when sold.
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
User avatar
ipdiddly
Posts: 549
Joined: Fri Jan 01, 2021 10:24 am
Location: MA

Re: Cost-basis step-up at death

Post by ipdiddly »

Gill wrote: Fri Jan 15, 2021 2:37 pm
Are you just speculating on what the law is in this situation? Yes, the basis does change as the result of the death of the father and the entire value of the holding on date of death becomes the new basis with the date of death as the acquisition date. It is also a long term holding regardless of when sold.
Gill
OK, I answered on the fly based on normal gifting principles. However, the following link seems to answer the joint tenancy issues.

https://www.cpapracticeadvisor.com/tax- ... nt-tenancy

Since the father gifted the shares when he added the two sons names as joint owners, all the basis was his and the shares are included in his estate and the appropriate estate tax must be paid on the value of those shares, minus, of course, the estate tax exemption. The shares then pass with a stepped up basis, i.e. the share price on the date of death.

Thank you for pushing me to look it up. Mea culpa. A little knowledge is a dangerous thing.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Cost-basis step-up at death

Post by Alan S. »

Agree on the basis adjustment.

With respect to the gifting issue, adding a JT to a real estate tax is treated as a completed gift. Adding a JT to a bank account is not until the donee withdraws funds. From the 709 Inst, p 5:
If you create a joint bank account for
yourself and a donee (or a similar kind of
ownership by which you can get back the
entire fund without the donee's consent),
you have made a gift to the donee when
the donee draws on the account for his or
her own benefit. The amount of the gift is
the amount that the donee took out
without any obligation to repay you.
If you buy a U.S. savings bond
registered as payable to yourself or a
donee, there is a gift to the donee when he
or she cashes the bond without any
obligation to account to you.
In many cases, taxpayers have been extending bank account treatment to mutual fund and brokerage accounts. I am not aware of any specific guidance from the IRS on this.
Footquest
Posts: 1
Joined: Tue May 25, 2021 6:23 pm

Re: Cost-basis step-up at death

Post by Footquest »

What is the 709 Inst, p 5:? I am having similar situation and need to know how the step up will be at my dads death. I am his jtwros on a brokerage account. The company tells me I will be entitled to 50% step up. I’m in New Jersey . I didn’t know about this account until dad signed power of attorney and became incompetent. I’ve been told by tax attorney that since my dad made me joint “owner” it was a gift and not able to step up. He also said publication 551 doesn’t apply since that was a business. Is there an irs rule I can see that says wether or not jtwros is a gift.
senex
Posts: 1087
Joined: Wed Dec 13, 2017 3:38 pm

Re: Cost-basis step-up at death

Post by senex »

Footquest wrote: Tue May 25, 2021 6:51 pm What is the 709 Inst, p 5:? I am having similar situation and need to know how the step up will be at my dads death.
Alan was referring shorthand to IRS Form 709 Instructions, page 5.
https://www.irs.gov/pub/irs-pdf/i709.pdf

The brokerage company might have a form that allows you assert that 100% of the assets were your father's, and that they should step up the entire account. It's worth searching/asking.
Post Reply