Joint Tenants With Right Of Survivorship: Understanding Cost Basis At Death
Calculating the step-up in basis of investments at death is usually not that difficult. All individually owned capital assets included in a deceased person’s estate receive a new cost basis, generally valued as of the date of death. However, jointly owned property can be trickier.
First, let’s cover the step-up in basis of property held between husband and wife in joint tenant with right of survivorship form, which also applies to tenants by the entirety. When the only joint tenants are husband and wife, half of the fair market value at date of death is included in the decedent’s estate and the surviving spouse’s new basis will equal half the total pre-death basis and half the fair market value at date of death. The formula looks like this:
New basis = (Date-of-death fair market value + Old basis) / 2
Here’s a practical example to help determine the new basis: At the time of Tom’s death, he and his wife, Nancy, owned a portfolio of common stocks as joint tenants. Tom paid $5,000, and Nancy $11,000, of the original $16,000 purchase price. When Tom died, the stock was worth $22,000, and Nancy acquired Tom’s interest by right of survivorship. Four months later she sold the stock for $29,000. Nancy will realize a long-term gain of $10,000. Nancy’s basis is $19,000, the sum of $8,000 -half the original basis- plus $11,000 comprised of Tom’s half interest included in his estate.
Tom and Nancy’s portfolio
| Shares |
Original price |
Total basis |
Fair mkt value at death |
New basis |
| 100 |
$10 |
$1,000 |
$2,000 |
$1,500 |
| 100 |
$20 |
$2,000 |
$2,500 |
$2,250 |
| 100 |
$30 |
$3,000 |
$4,000 |
$3,500 |
| 100 |
$40 |
$4,000 |
$5,000 |
$4,500 |
| 100 |
$60 |
$6,000 |
$8,500 |
$7,250 |
|
|
$16,000 |
$22,000 |
$19,000 |
Each position received a half step-up in cost basis. Nancy is unable to claim a full step-up on certain assets and no step-up on other assets; each share receives a one-half step up equally.
Notice that even though the spouse’s contributed different amounts to the original $16,000, they both own an equal 50% share of the property for inclusion in their estates. This is unique to husband and wife joint tenant with right of survivorship property as we will see later in the article.
Those in community property states must consider an interesting twist. The new basis in community property is fair market value at the date of death for both halves of the community property, even though only half is included in the decedent spouse’s estate. This translates into a full step-up in cost basis at the first spouse’s death which is certainly simple enough to determine and very advantageous for the surviving spouse.
People who own property as joint tenants with right of survivorship and are not married go by the consideration furnished rule. This rule states that the decedent’s gross estate includes that portion of the property as the decedent’s share of the consideration, or price paid for the property, bears to the total consideration. The new basis for each surviving co-owner’s interest is his or her old basis plus an increase for his or her proportional share of the amount included in the decedent’s estate.
Example: Years ago, brothers Steve and Stan purchased stock for $10,000, taking title as joint tenants. Steve paid $6,000 and Stan paid $4,000 towards the purchase. At Steve’s death the stock was worth $20,000. Included in Steve’s gross estate is 60% of the stock’s value because that corresponds to his share of the consideration paid for the stock, even though property law recognized that he owned 50% of the stock immediately before death. Stan’s new basis would be $16,000, which is the amount included in Steve’s estate of $12,000 plus Stan’s $4,000 basis in his pre-death interest in the property.
Hopefully this article has shed some light on a commonly misunderstood area. Contact a Financial Advisor to discuss further how joint tenant with right of survivorship cost basis may apply to you.
Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC
NOTE:
ALL information contained in this site is for illustration
purposes only, and by NO means should be considered individual tax or
legal adivce under any circumstances whatsoever!
Lynn R. Siewert AIMC
Pension Consultant | Branch Manager
CA Insurance License #00B00579
2005 E. Evergreen Blvd
Vancouver, WA 98661
Ph: 360-750-9626
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