Dear Liz: I am a beneficiary of my father’s brokerage account. Upon his death, the brokerage company closed his account and transferred all of the equities to me in a new account. How will I know the cost basis for capital gains purposes when I sell the stocks?
Answer: You will use the value of the stocks on the day of your father’s death as the new tax basis. This is known as a “step up” in basis, since typically the fair market value at death is higher than the original basis, or what your dad paid for the stocks. Any appreciation that occurred during his lifetime won’t be taxed, but you would be subject to capital gains tax on any appreciation that occurs after that date.
Can you clarify if a son can avoid tax due to “Step up in basis” on inheritance if a stock mutual fund account was held as joint with right of survivorship. Should the father hold the account in his own name in a living trust with the son designated as a successor trustee?
There’s no tax due to step-up in basis. A step-up in basis is a good thing for tax purposes; it means that all the appreciation that happened during the original owner’s lifetime is never taxed. Adding someone as a joint owner can create a gift situation so please talk to a tax pro or estate planning attorney about the best way to hold and pass on your assets.