Ask the Probate Judge—More on Stepped-Up Basis
Rudd, appeared July 17, 2003, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: Does stock held by a brokerage firm and inherited have to go through probate in order to be valued at fair market value on the date of death? How is stock inherited by Payable on Death (POD) or Transfer on Death (TOD) valued to the heir and reported? Does this vary by state or is it nationwide? S.
Last year I wrote about the "stepped-up basis" of inherited assets. The general rule is that you value a decedent's assets at their fair market value at the time of the decedent's death. "Stepped-up basis" is a creation of the Internal Revenue Code, which is federal tax law. So the rule applies nationwide. The rule may vary depending on whether you live in a community property state such as New Mexico.
In New Mexico, if an asset was acquired during the marriage with community funds and is held as joint tenants, the entire value of the asset is stepped up at the death of the first spouse. In non-community property states, if each spouse owns one half of the joint tenancy property, then only one-half of the property is stepped up at the death of the first spouse.
A court probate proceeding is used to pass stock or other property to the rightful heirs or devisees. Probate does not affect the stepped-up basis. Both probate and non-probate property, such as POD and TOD assets, receive a stepped-up basis at the decedent's death.
Q: When my husband and I die, we intend to leave our house to both our children. We paid $100,000 for it and have put in about $65,000 of upgrades--it's now worth about $220,000. When our children sell the house after our deaths, will they have to pay a tax on the $55,000 profit if one of them doesn't live in the house for two years? A.B.
A house owned by a decedent is also stepped up in value at the decedent's death. If you paid $100,000 for your house that is worth $220,000 at the death of the first spouse, in New Mexico the house is stepped up in value to $220,000. If the remaining spouse owns the house until his or her death and the house is worth $300,000 at that time, it will be stepped up again to $300,000.
There is no requirement that the heirs live in the house for two years in order to receive a stepped-up basis. The two-year residence rule you mentioned relates to capital gains tax law, rather than federal estate tax law.
Prior columns can be viewed at www.bernco.gov. Click on "Probate Judge," then "Newspaper Columns." A column titled "Basis of Stocks at Death" appeared on September 19, 2002.