Ask the Probate Judge—Basis of Stocks at Death
Rudd, appeared September 19, 2002, 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: New Mexico, being a community property state, I understand that, at the time of a spouse's death, all property, such as real estate, stocks and bonds, gets a stepped-up basis for tax purposes. Suppose a couple buy stock at $50 a share and at the time of death the stock has gone down to $10 a share. What is the basis for this stock when the surviving spouse sells it? D.H., Los Alamos
Often assets have increased in value since their purchase. The general rule is that you value a decedent's assets at their fair market value at the time of death. This increase in value at death is called the "stepped-up basis."
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 other states only one-half of the property is stepped up.)
This means if you paid $15,000 for your home that is worth $200,000 at the death of the first spouse, the home is stepped up in value to $200,000. If the property were sold soon after the death of the first spouse, no capital gains tax would be due. If the property was held until the death of the remaining spouse and was worth $300,000 at that time, it would be stepped up again to $300,000.
If an asset is acquired and held as joint tenants with someone other than a spouse, then only one-half of the asset is stepped up at the death of the first joint tenant. There are even different rules when you add another person's name to a deed as a joint tenant when that person did not pay a full share of the price.
An important exception to the stepped-up basis rule: assets that are tax-deferred or have not yet been taxed, such as U.S. savings bonds, certain pensions, IRA's and annuities, are not stepped up at the death of their owners. These types of assets also become subject to income tax, which must either be paid by the estate or the recipients of the property (most other inherited assets are not considered income by the IRS). For those of you who crave tax topics, this is called "income in respect of a decedent." Consult a knowledgeable tax attorney about these complex tax rules.
Applying the general rule that your stock is valued at its fair market value at the date of death (and assuming the stock is held jointly), the stock will be valued at $10 a share. In your case, this is a "step down" in basis. The stock's basis, if the surviving spouse sells it, would be $10 a share.
© 2002, Merri Rudd & Albuquerque Journal, All Rights Reserved