Q. A good portion of my non-retirement assets are stocks and mutual funds that are jointly held with my spouse. If one spouse is terminally ill, does it make any sense from a tax perspective to make the terminally ill spouse the primary owner of the stocks and bonds and the surviving spouse the beneficiary? Thus when the primary owner passes away, the surviving spouse who is the beneficiary can get a step-up in basis and avoid paying capital gains if they sell the investments. For example, one purchased Facebook when it was $40 a share as joint tenants. Facebook is now $300 a share and the registration is changed from joint tenant to ownership of the spouse that is terminally ill. The primary owner passes away and Facebook is now $350 a share, the surviving spouse who is the beneficiary pays capital gains not on the original purchase price of $40 but on the $350 value of the stock.
— Trying to save
A. It’s a crafty move to save on capital gains taxes.
And it’s legal.
When you inherit property, from someone you receive a step-up in basis.
“Basis is tax speak for your cost. So inherited property comes with a basis equal to the market value on the date of death,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
He said when a living person gifts you property, your basis is the giver’s basis. So a gift may come with a hidden tax liability, he said.
If you have a brokerage account jointly held by you and your spouse, you each have an undivided interest in the account, he said. If your spouse passes away the surviving spouse inherits the deceased’s interest in the account. This results in a step-up in basis for half of the account, he said.
You’re asking if the healthy spouse can gift their half of the account to the terminally ill spouse in order to receive a step-up in basis for the entire account.
“Yes, this is perfectly legal,” Kiely said. “Spouses can make unlimited transfers between each other free of gift taxes. When the terminally ill spouse passes, the survivor inherits the account with a date of death tax basis.”
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
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