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-- Posted: Oct. 5, 1999

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Taking stock of inheritance

Dear Dollar Diva,
My wife died this year with several stocks held in her trust, with me as the beneficiary of the trust. What would the cost basis of those stocks if I were to sell them?


The basis is the amount you would report on your individual tax return as the "cost" when you sell the stock. There are two possibilities:

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Stepped-up or stepped-down basis: The amount you report as "cost" is the market value of the stock at the date of your wife's death.

This generally occurs when stock is inherited, and the value of the stock is included in the decedent's estate for estate tax purposes even if no estate taxes are required.

Carried-over basis: The amount your wife would have reported as "cost" if she had lived is the same amount you would report as "cost" when you sell the stock.

Carried-over basis usually occurs when stock is received as a gift. It can also occur when inherited stock is not included in the decedent's estate for estate tax purposes because, for example, the decedent had only a life income interest in the trust and never personally owned the stocks.

Ron Aucutt, an estate tax attorney with McGuire, Woods, Battle & Boothe LLP, in McLean, Va., says he would need to know what kind of trust your wife had to determine the stock basis. He's suggesting two possible scenarios:

1. The stock will have a stepped-up or stepped-down basis if the trust is a revocable living trust with the following characteristics:

  • The trust is set up by your wife, who is the beneficiary until her death.

  • You become the remainder beneficiary, or you receive the stock outright when she dies.

  • The value of the stock is included in her estate for estate tax purposes, even though there will be no estate tax due on the stocks passed on to you.

There is an exception: If any of the stocks in the trust were given to her by you within one year of her death, the basis of those stocks would be carried-over.

2. The stock will have a carried-over basis if the trust had the following characteristics:

  • The trust was set up by someone else, perhaps her parent.

  • Your wife is the beneficiary until her death.

  • You become the remainder beneficiary, or you receive the stock outright when she dies.

  • The value of the stock is not included in her estate for estate tax purposes.

The Dollar Diva reminds you that the stepped-up feature of appreciated stocks makes them a sweet way to remember your loved ones when you die.

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