Basis change with death of spouse?

[TeeRuh]

I recently lost my DW. Vanguard (wonderful Vanguard) made me open a new account in my name only and move all funds from our joint account (COMM PROP WROS account). I was told by one of the three reps I dealt with (three reps because many of them do NOT know what they are doing) that the basis would be stepped up upon the transfer and looking at the accounts the cost basis now reflects the date of the transfer. Is this correct? The cost basis is the date of the transfer not the date of her death; which seems kind of arbitrary. This is obviously a good thing, but I don't want to go to IRS jail either. Hopefully one of you really smart tax people can set me straight, (I couldn't find an answer on IRS.gov)


If this cost basis adjustment is legit it would have been nice if the transfer didn't occur on the day the market dropped 2.5%. It should have occurred three days earlier but there was that whole Vanguard customer service saga . . .


Thanks for the help,
t.r.

 

[SecondCor521]

My condolences on your loss, TR.

Generally speaking assets in taxable accounts receive a step-up in basis to the FMV on the date of death. I'm fairly certain this would include all of the assets in your community property accounts (not just half) if you live in a community property state.

IRS references:

https://www.irs.gov/publications/p551#en_US_201812_publink1000257013
https://www.irs.gov/faqs/interest-d...-income/gifts-inheritances/gifts-inheritances

The FMV is typically the closing price of the asset (mutual funds), the average price of the asset that day (stocks), or the appraised value of the asset (houses).

I would suggest you contact Vanguard, inform them of her date of death, ask them to update the basis to reflect the FMV to that date, and then confirm that they have done so. They should be able to handle this correctly just knowing the date. There's a report on Vanguard's website that you can run for your account for any date in the past showing the values (it's under "My Accounts" / "Balances and Holdings" / "Balances by Date" - you may have to run it on the previously existing joint account rather than your new single account). The basis should match the values in that report after they take care of it for you.

Also, as I sort of alluded to above, you may be eligible for a step-up in basis on your home as well, which may help avoid capital gains tax if the home has appreciated greatly since you bought it.

Note that the holding period for stocks or other assets which have been inherited are considered long term regardless of actual holding period. See page 53 of the IRS instructions for Schedule D here: https://www.irs.gov/pub/irs-pdf/p550.pdf

(Minor note: The executor of her estate can elect an alternate valuation date of six months after death. This may be useful if the value of the assets in question increase or decrease in value greatly six months from now. But I think the accounting for this option is messy and difficult so I personally don't plan on ever using it.)

 

[TeeRuh]

SecondCor, Thank you so much! I was surprised by the step up, but when they used the account transfer date it just didn't make sense. I'll let you know how Vanguard reacts to my request.


Thanks again,
t.r.


p.s. Thanks for the condolences. Focusing/dealing with all of this estate minutia is one way I keep from losing my mind.

 

[TeeRuh]

O.K. I owe Vanguard at least a partial apology. Though the rep told me that the basis would be set based on the account transfer date, it is in fact (after a careful review of the numbers) reset per her date of death.



I was certainly not expecting this. This was a 10+ year old account and there is some tech stock in there that has probably appreciated 400%ish.


Thanks for the IRS references as well.


t.r..

 

[Montecfo]

So sorry for your loss.

I think SecondCor521 has it right. And my recollection from being a tax guy in Texas is the same that community property gets the full stepup, an interesting nuance.

 

[VanWinkle]

Sorry for your loss, I am in Illinois and received a step up basis on 50% of the joint account assets. Vanguard did a great job at handling the transition. I also had to have a new account opened and the assets transferred to the new account.

Best to you,

VW

 

[SecondCor521]

SecondCor, Thank you so much! I was surprised by the step up, but when they used the account transfer date it just didn't make sense. I'll let you know how Vanguard reacts to my request.

Thanks again,
t.r.

p.s. Thanks for the condolences. Focusing/dealing with all of this estate minutia is one way I keep from losing my mind.

You're welcome. I dealt with my Mom's estate for about six months after she died and felt the same way. It was also for me a way of honoring my Mom (ad helping my Dad) by taking care of her financial and legal affairs.

 

[MRG]

Very sorry for your loss.
The advice and Vanguard's solution is correct, they use the date from the death certificate. Death claims are always complicated in the financial services organizations. There's a number of differences in the state laws that make it more complicated than it would appear.

 

[sakowitzm]

Two additional notes; one small one not so small.
I also recently lost my wife, and these are things I've learned; I am NOT a tax expert.

1. Regarding the step-up price, since mutual funds are only priced at the end of the day, that value is easy to identify. However, wrt stocks and ETFs, how does one come up with the "average" value? The answer, I was told, is that they take the average of the high and low for the day. Reasonable; makes sense; though not necessarily what one would think of, straight off.

2. Much more importantly, wrt the step-up value of your house. You should/must immediately have an appraisal done. Just the kind of appraisal one would get when one is buying a house. The professional appraiser will come out to view everything in person, check local comps, and assign a current appraised value.

Now.... I don't live in a community property state, so your experience may be different. But here's how it works for me.

Some day, when you sell the house, you will (presumably) have a capital gain. Your gain is calculated by dividing the house in half. The basis for "your half" of the house is half of the original purchase price, + half the cost of any improvements.

The basis for the half of the house you inherited from your late wife will be one half of the appraised value. No improvements factor in here, because the appraisal was done on the current, already-improved house.

And then, of course, the sales price gets divided in half, one-half applied to each of the halves described above. And you get to subtract any costs associated with the sale.

Finally, your capital gain will be the two sales prices less the two basis prices, if you know what I mean by that. From that capital gain, you get to use your and your late wife's exemption of $250K each. IF IF IF you sell the house within two years, you can use BOTH of the exemptions, even though your wife has passed. AFTER two years, you can only use your own exemption.

Again, not an expert. I may have some parts of this wrong, but this should put you on a path to get the correct answers.

Best wishes to you in your widower journey. It's a challenge every day, but it does get easier.

 

[cathy63]

... 2. Much more importantly, wrt the step-up value of your house. You should/must immediately have an appraisal done. Just the kind of appraisal one would get when one is buying a house. The professional appraiser will come out to view everything in person, check local comps, and assign a current appraised value.

Now.... I don't live in a community property state, so your experience may be different. But here's how it works for me...

I am sorry for the loss of your wife.

In a community property state, the surviving spouse gets a step-up on the full value of the property, so it's much easier to figure the basis. No need to worry about which improvements were done before and after or divide anything in half. Just get an appraisal within a few months and that's your new basis.

Another thing to think about is whether the value of your own future estate may exceed the exclusion amount for estate tax. In 2026, the exclusion amount will revert from the current $11.7M to ~$5M. If your assets may exceed that amount, you should look into filing an estate tax return for your spouse in order to elect portability of the spouse's unused exclusion so that it can be applied to your estate when you pass.

 

[Sunset]

Condolences on your loss.

Here is information I saved, that explained the time limit on claiming the unused exemption.
What Does Portability of the Estate Tax Exemption Mean?

Portability of the estate tax exemption means that if one spouse dies and does not make full use of his or her $5,000,000 (in 2011, or $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, and $5,430,000 in 2015) federal estate tax exemption, then the surviving spouse can make an election to pick up the unused exemption and add it to the surviving spouse’s own exemption.





What a great concept, right? Well, keep in mind that historically the “AB Trust” system was designed to do what the portability election does. Under an AB Trust estate plan, when the first spouse dies, his or her or estate will be divided into two separate trusts, one that is equal to the federal estate tax exemption (this is the “B Trust”), and one that holds the amount that exceeds the exemption (this is the “A Trust”). (Note that if the value of the deceased spouse’s estate does not exceed the estate tax exemption, then only the “B Trust” will need to be created and funded.) By dividing the deceased spouse’s estate into two portions, an AB Trust plan allows the B Trust to pass estate-tax free to the heirs after the surviving spouse dies.

And since the surviving spouse will have their estate tax exemption that can be applied to the value of their estate, an AB Trust plan will allow a married couple to pass on two times the federal estate tax exemption free from federal estate taxes. (Note: In some states that collect a separate state estate tax, "ABC Trust" planning is necessary instead of AB Trust planning.)

But now, with the introduction of portability of the estate tax exemption, married couples do not have to use AB Trust planning to take advantage of both spouses’ estate tax exemptions.


Portability Example

For example, if Bob and Sally are married and Bob dies in 2011 and only uses $3,000,000 of his $5,000,000 federal estate tax exemption, then Sally can elect to pick up Bob's unused $2,000,000 exemption and add it to her estate tax exemption. Assuming that Sally has not used any of her estate tax exemption for lifetime gifts and makes the portability election, then Sally will have a $7,250,000 exemption in 2013 (Bob's unused $2,000,000 exemption plus Sally's $5,250,000 exemption = $7,250,000 exemption).


How to Make a Proper Portability Election

So how does Sally go about making the election to use Bob's unused estate tax exemption? For a surviving spouse to properly make the election to use the deceased spouse’s unused estate tax exemption, the surviving spouse must timely file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Form 706 is due on or before nine months after the deceased spouse’s date of death; however, an automatic six-month extension can be requested by filing an IRS Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, on or before the due date for Form 706.


Note: On February 17, 2012, the IRS released Notice 2012-21, which provides that for certain estates, the portability election can be made within 15 months after the date of death even if the surviving spouse failed to timely file a Form 4768.


What Is the Future of Portability of the Estate Tax Exemption?

While the provisions of TRUIRJCA officially expired on December 31, 2012, the provisions of ATRA have made portability a permanent option for married couples. Of course, anything that Washington makes "permanent" is permanent until a decision is made that it should be changed.

 

[RetMD21]

Sorry for your loss.

I was shocked about the step up in basis in community property states. There are some very knowledgeable folks here.