Selling jointly owned stock after the death of a spouse, is different than selling other jointly owned assets. A recent article from Kiplinger, “Selling Jointly Owned Stock After the Death of a Spouse,” provides good information on how the transaction takes place and what kind of tax burden you can expect as a result of the sale.
If the spouses owned the stock as joint tenants with right of survivorship, then the surviving spouse became the sole owner after the first spouse died. A call to the brokerage firm will usually tell you what documentation you need to provide.
As far as the taxes, when you sell the shares, the way in which you’re taxed depends on where you live. Most states say that half of the investment’s tax basis was stepped up, when the first spouse died. This means that when you sell, the capital gains or losses on your half of the investment will be based on the stock’s value when you originally purchased it. However, the basis of the spouse’s share will be based on its value at the time of your spouse’s death.
Let’s say that you and your wife purchased shares of stock for $20,000. The stock was worth $70,000 when she died, and you sold the shares for $80,000 sometime later. Each spouse started out with a basis of $10,000 (one-half of the original $20,000 investment). Because the stock was worth $70,000 when the spouse died, the basis of that half got bumped up to $35,000. When you eventually sell all the shares, the basis will be $45,000 (your original $10,000 and the stepped-up $35,000). The surviving spouse will be taxed on a capital gain of $35,000 ($80,000 minus $45,000). Even if the shares are sold less than a year after she died, you’ll still pay long-term capital-gains taxes on the profit.
However, if you live in a community-property state like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, the calculations are different. In those nine community-property states, the entire investment would be stepped up to its value at the date of the first spouse’s death. If the shares were worth $70,000 when she died, and you sold them for $80,000, you’d be taxed only on the $10,000 increase. If you EVER lived in one of those nine states, it is possible that some of your assets are eligible to be considered community property. Check with your tax advisor or tax attorney.
While it’s likely that the financial institution can easily get records of the investment—original purchase costs, value on the day of the spouse’s death—it’s better if you maintain these records in your own files for future use. It’s one less task and one less place where errors can occur.
Reference: Kiplinger (April 7, 2017) “Selling Jointly Owned Stock After the Death of a Spouse”
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