r/investing
Step-up in basis - a reason for separate accounts in marriage?
Author discusses using separate brokerage accounts instead of joint ones to maximize the step-up in cost basis for tax purposes upon a spouse's death.
I recently learned about the step up in cost basis a child receives when inheriting a brokerage account from a deceased parent. Their cost basis is now the fair market value on the date of the owner's death, which of course could result in huge, un-taxed gains since the original purchase many years ago.
From my reading, a spouse is entitled to the same step up in basis \only if the brokerage account was solely owned by the deceased spouse - NOT if it was a jointly owned account.\
I just so happened to have a brokerage in only my name. And today my wife opened one, only in her name. Is this how it works? If either of us happens to die, the other would inherit the brokerage and get a step up in basis? This seems like a huge advantage, based on a small detail that would be easy to overlook. I would guess most spouses have joint accounts for simplicity and perceived protection - I would have added her to my own if not for learning about this step up in basis.
Thanks for any insight!
(To be clear, I am not looking for personal financial advice, but rather other people's understanding of the rule, and whether I understand it correctly, in a general sense.)
It won’t make a difference, all things being equal. In a joint account you’ll get a step up on half the account, which is the same as if you split it into two individual accounts.
That is true for a non-community property state.
In a community property state a joint account gets a full step up in cost basis upon the death of each spouse.
What state you live in makes a huge difference in federal taxes in this case.
Understood. OP mentioned elsewhere they’re not in a community property state, so I skipped over that part.
I don't know the answer, but I'm interested.
From a little chat with perplexity, it seems that whether your state is a "community property state" can have an impact, but my state is not.
If it were a joint account, you could count on getting a step up in basis on half of the balance in most cases. So perhaps that's the catch / it's all potentially a wash! We could split our total investment 50/50 into two accounts so that one day, one of us gets a step up on the others account...or have one account where one of us gets a step up on half. Same effect. Unless I try to hedge which of us is likely to die first and give them the bigger balance lol, such lovely thoughts to ponder.
Maybe ask in r/tax?
Depends if you are in a community property state as well but yes this is a strategy occasionally used
IRS Pub 551:
"Appreciated Property:
The above rule doesn't apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis in this property is the same as the decedent's adjusted basis in the property immediately before their death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis."
Personally I would accept the 1/2 step up in the joint asset. With my luck, doing this would guarantee an 11 month term on someone's life...
You are correct with the above statement. Speaking from experience.
It has nothing to do with relation. The relationship angle applies to retirement accounts and plans.
For regular investment account, real property and other deeded assets, the step up is by inheritance. By State.
For community property, the asset is owned by all owners, and the entire account or asset is stepped up. For common law, the asset is owned by each, so that portion is stepped up.
A nonowner who inherits gets a full step up under either structure. If you have split beneficiaries, they still get their shares, stepped up.
If the account is a joint account then you can’t get a setup in cost basis. This is what my broker has told me.
You get step up in basis on 1/2 of a joint account if you are in a non-community property state.
If you are in a community property state the entire joint account gets a step up in cost basis upon the death of the first-to-die spouse. Then the account gets a second step up in basis again upon the death of the second spouse.
It depends on the State and titled ownership vs beneficiary:
https://www.investopedia.com/terms/s/stepupinbasis.asp