How do the cost-basis of securities get stepped up?

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by Jennie Hoopes, CPA

A living will is created as a family living will and both husband and wife are trustees. The trust has a security account and both trustees reside in California. If one of the spouses passes away, does the cost basis on the securities get stepped up to the date of the death of the deceased spouse? If so, would the whole account be stepped up or only 50 percent?

First, let's get our terms straight. A "living will" essentially is a document describing how you would prefer to be treated medically should you be incapacitated and near death. For example, the living will might say you do not want to be resuscitated should you stop breathing. Although the will specifies how you would like to be cared for in such situations, you still need to appoint someone as a health care proxy. That person can make health care decisions for you based on your directives in the living will. You should also give durable power of attorney to someone you trust. That person then has the authority to make financial decisions on your behalf when you are incapacitated.

What you describe in your question is really a joint revocable living trust, or family trust. You and your spouse are joint trustees, and the assets in the trust are jointly managed by the two of you. In a community property state such as California, the general rule is that the cost basis of community assets will receive a full step-up to fair market value at the death of the first spouse. This will apply to the basis in the security account held in the trust name as long as none of the funds are considered separate property. The fair market value of the individual securities will be the average of the high and low market quotes on the date of death. Regardless of the original acquisition date, the securities will be treated as if they have been held for more than one year and will be eligible for long-term capital gain treatment.

Jennie Hoopes, CPA, a team member with Sweeney Kovar, LLP, in Danville, Calif.

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