Widows Make Sure You Receive Your Step up in Basis. (2024)

In a previouspost, we discussed the important of using the step up in basis to avoid capitalgains on your appreciated assets. See http://joneselderlaw.com/?p=746. There is another often overlooked aspect of thestep up in basis and that is the step up a widow is entitled to receive. Many widows are unaware of this rule so theydo not report the stepped-up value for their deceased spouse’s assets. See https://www.wife.org/widows-pay-capital-gains-tax-sell-house-death-spouse.htm#:~:text=Step-Up%20Basis%20After%20the%20Death%20of%20a%20Spouse.,his%20half%20of%20the%20home%20went%20to%20you. Failure of the widow to use his or her stepup in basis could be the difference between paying a significant capital gainstax or paying nothing at all. To betterunderstand how the step up in basis can be utilized by a widow lets look at an investmentaccount.

Example of Widows Basis Adjustment

Assume a married couple has a joint account that the widow and decedent opened together. In that account they purchased a stock for $50 per share in 2010. That stock is now worth $125 per share taking their $10,000 original investment to $25,000. In that stock alone, the widow would have a $15,000 capital gain upon selling it. Assuming a long-term Capital Gains rate of 20%, the widow would owe $3,000 in capital gains tax. However, upon the death of the spouse, the deceased share in the cost basis of those shares should be stepped up to the fair market value on the date of death. See https://www.kiplinger.com/article/retirement/t021-c032-s014-a-widow-s-broker-made-a-huge-mistake.html. One half of the shares should receive a step up in basis to the current fair market value of $125 per share. The decedent’s share of the stock would have a basis of $12,500. Adding to the widow’s original basis on her half of the investment ($5,000) that would make the stepped-up basis $17,500. The capital gains tax owed by the widow would be reduced from $3,000 to $1,500 on just this single investment. If there were numerous such investments in the couple’s account the financial impact of the step up in basis could be huge.

Types of Assets that Receive Stepped Up Basis

Investment accounts are not the only assets eligible for the step up in basis. Real estate is another area that can benefit greatly from the step up in basis. Vacation homes, farm ground or hunting ground can receive the step up in basis reducing the potential capital gains associated with those properties increasing in value. Farm ground, in particular, may have been held for years and worth many times more than what was originally paid for it. The step up in basis can also be used on the family home to reduce or eliminate capital gains on the sale of the home. This is especially true when coupled with the individual exemption that exists on the family home. The combination of these two tax provisions should permit most widows to downsize their home without fear of significant capital gains tax.

IRD Assets Will Not Receive Stepped Up Basis

Unfortunately, not everything will receive a step up in basis. The Internal Revenue Service draws a distinction for income in respect of a decedent. All the income the decedent would have received had the death not occurred and that was not required to be included in the decedent’s final return is classified as income in respect of a decedent. See https://www.irs.gov/publications/p559#en_US_2019_publink100099594. The most common assets that fall into the income in respect of a decedent category are retirement accounts such as 401k, IRA, 403b type. These will not receive step up in basis and, actually, will be included in the income of the beneficiary as they are taken out.

Educate Yourself with a Vision Meeting

If you or your family are struggling with any Estate Planning or Probate concerns, make an appointment with the experienced St. Charles Estate Planning Attorneys at Jones Elder Law. That way, you can decide what happens to the assets you worked so hard to acquire. If we can help guide you, contact our St. Charles Estate Planning Law Firm at (636) 812-2575and ask to schedule a call or virtual consultation, what we call a Vision Meeting http://joneselderlaw.com/vision-meeting/. We have developed the Minimal Contact Planning process to be used while the Covid-19 virus remains a concern for your safety and ours.