Basis Adjustment At Death

MOERTL, WILKINS & CAMPBELL, S.C.

Clients often delay selling a stock or mutual fund because the asset has appreciated in value and they don’t want to pay taxes. If an individual dies, the surviving beneficiary usually gets a “step-up” in cost basis. For example, assume Microsoft stock is purchased at $20 per share and it is currently worth $40 per share. If the owner of the stock sells it, capital gains tax will be owed on the $20 increase in value ($40 - $20). However, if the owner dies while still owning the stock, the beneficiary gets a new cost basis of $40. If the beneficiary sells the stock, there would be no capital gains tax ($40 - $40).

As we all know, 2008 was a disaster for investments. Assume a stock portfolio has substantially decreased. What happens if the owner dies? Keep in mind that the “step-up in basis” rule is actually an “adjustment to fair market value” rule. If the owner of stock purchased it at $40 per share and it is worth $20 per share and the owner dies, the beneficiary now has a $20 cost basis. If the owner had sold the stock prior to death, he would have been able to take a $20 per share loss. However, at his death the loss disappeared and no one can take it.

Each situation is different. It is important that you review your portfolio keeping in mind your set of circumstances.

TITLE 19 FINALIZED (finally)

It appears we at long last have some certainty. The new law which includes a five year look-back will apply to all gifts (divestments) made after January 1, 2009.

We hope to receive more information in the next month and will include more detail in our next newsletter.

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