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FAQ: How to Record Step up Cost Basis in Event of Death

Rick Pula

My spouse recently passed. We have a joint investment account with various stocks and mutual funds. I need to record a new "stepped up" cost basis for each of them and wanted to verify how. I logically concluded (before reading any answers on the forum) that the only way is by "Removing the appropriate number of shares" and then "Adding them back with the date of death and new market cost basis". By all the reading, it would appear that this is the only way to accomplish it. I would appreciate confirmation that this is the correct method.

Then not realizing any of the cost basis dilemma, I did a transfer of shares between her IRA and my IRA for 1 security. So it transferred all the original data from her account to mine. Again, I am searching for the correct method to fix this. Do I have to edit each transaction? or Can I simply do the Remove/Add shares transactions? Will all reports such as capital gains reflect the correct information depending on which to use? (I don't think you can reverse the transfer between accounts transaction either to undo it if necessary).

On this note as well, how important would it be to change it in a IRA? I am told that any withdrawals from an IRA for pretaxed contributions are treated as ordinary income. So there would be no need to calculate capital gain/losses.

It would be most appreciated if the methods described above can be confirmed as the proper way to go and I thank any member that responds for his/her information & suggestions

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Comments

BenF

For anyone finding this thread in the future, I wanted to make a suggestion for what I did in a non community property state.

1) Create a new account in quicken for the stepped up cost basis. It seems many financial institutions do this anyway to re-title the account, but even if they don't, still create a new account in Quicken.
2) For each security;
2a) If there are a large number of lots, export that information to excel to calculate half of each lot. Most institutions only calculate shares to the 3rd decimal, but Quicken will allow more, so decide if you want to allow .0005 of a share or if you want to round that up or down based on the 3rd decimal. Adjust these by 1/1000th of a share here and there so that the overall total for the security is half of the total holding.
2b) In the original account, enter a transaction for "shares transferred between accounts". Enter half the holding amount for the number of shares and then click on Specify Lots. Go through the lots and enter the information calculated in 2a, or on the fly for a small number of lots. When you click Done, one remove transaction will be created in the original account and an Add transaction will be created in the new account for each lot. These are for the surviving joint holder.
2c) Now create a Remove Shares transaction for the other half of the holding.
2d) In the new account enter an Add Shares transaction for the other half of the holding corresponding to what was removed in 2c. Use the share price as of the day of the joint holder's death and set the Date Acquired for these as per Tom's suggestion of 1 year and a day prior to the joint holder's death. These are the shares with the stepped up cost basis.

I think this should get Quicken pretty close to the net result of what the broker is going to report as capital gains on the 1099 when you go to sell the stock.

unknown

1st paragraph:

The Remove/Add process is probably the best way of handling this. If you are in a community property state you'd do a "Remove" of all the stock then Add back all the stock, on a stock-by-stock basis. I'd suggest entering the "Date acquired" as a year and a day prior to your spouse's death since the inherited stock is considered "long term" irrespective of the time you jointly owned it or how long you own it after the date of death.

If you are in a non-community property state the process is more difficult because only half of the jointly held stock receives the step up and the "Remove" action works on a FIFO basis. You can still do one Remove action for all the stocks, but you need to do 2 "Adds" for each lot of stock, half with the original basis and "Date acquired" and half with the stepped up basis and the new "Date acquired." Best to do all your calculations outside or Quicken so you have your information at hand for your Adds.

2nd paragraph:

There is no step up in the basis of shares held inside an IRA, so a simple Transfer should fill the bill here. Capital gains reports should reflect the real profit arising from a sale - proceeds minus purchase basis - but that's pretty much irrelevant as only distributions out of the IRA get taxed, and they are taxed at "ordinary" rates, absent any "basis" in the IRA, (i.e., after-tax contributions).

Tom Young

[mention://67812 @q.lurker] [mention://15134 @pulapula]

q.lurker: Thanks for that. I'd forgotten - or maybe never realized - that you could specify lots since I've never done a piecemeal Remove action.

pulapula: The alternative to doing one Remove action for all shares of a particular stock followed by two Add actions for all lots of that stock is to do one Remove action for half the shares of a particular stock, clicking on the "Specify lots..." button, working through all the lots in the pop up window and entering half the shares for all lots, followed by one Add action for all lots of that stock. My instinct is that the second method might end up being more work and more confusing then the first, particularly if you have many, many lots, (e.g., years of dividend reinvestments).

q_lurker

1st paragraph:

The Remove/Add process is probably the best way of handling this. If you are in a community property state you'd do a "Remove" of all the stock then Add back all the stock, on a stock-by-stock basis. I'd suggest entering the "Date acquired" as a year and a day prior to your spouse's death since the inherited stock is considered "long term" irrespective of the time you jointly owned it or how long you own it after the date of death.

If you are in a non-community property state the process is more difficult because only half of the jointly held stock receives the step up and the "Remove" action works on a FIFO basis. You can still do one Remove action for all the stocks, but you need to do 2 "Adds" for each lot of stock, half with the original basis and "Date acquired" and half with the stepped up basis and the new "Date acquired." Best to do all your calculations outside or Quicken so you have your information at hand for your Adds.

2nd paragraph:

There is no step up in the basis of shares held inside an IRA, so a simple Transfer should fill the bill here. Capital gains reports should reflect the real profit arising from a sale - proceeds minus purchase basis - but that's pretty much irrelevant as only distributions out of the IRA get taxed, and they are taxed at "ordinary" rates, absent any "basis" in the IRA, (i.e., after-tax contributions).

Tom Young

[mention://79862 @Tom Young] : My QW2014 provides the "Specify Lots" button for Remove Shares transactions. FIFO is not a 'requirement', though it would still be the default. I believe it has been that way 'a long time', as far back as I can recall.

[mention://15134 @pulapula] : You repeatedly refer to reducing the "transaction" in half. I think you must have meant the "lot". The Remove Shares will not alter any transactions already existing in your transaction list. I believe in QW2014, you can accurately use Remove Share transactions to cut the original holdings in half for each lot held, and then enter One (or more) Add Shares transactions to Add in the removed shares at their new stepped up basis. In doing so, you would select one-half of each lot held as the removed shares. Per Tom's comment, you would use the 1-year+a-day dating on the acquisition date to force all future cap gains to be computed as long term. [Caveat: basis step up and estate related transfer protocols are not something I have experience with. Due your own due diligence.]

unknown

1st paragraph:

The Remove/Add process is probably the best way of handling this. If you are in a community property state you'd do a "Remove" of all the stock then Add back all the stock, on a stock-by-stock basis. I'd suggest entering the "Date acquired" as a year and a day prior to your spouse's death since the inherited stock is considered "long term" irrespective of the time you jointly owned it or how long you own it after the date of death.

If you are in a non-community property state the process is more difficult because only half of the jointly held stock receives the step up and the "Remove" action works on a FIFO basis. You can still do one Remove action for all the stocks, but you need to do 2 "Adds" for each lot of stock, half with the original basis and "Date acquired" and half with the stepped up basis and the new "Date acquired." Best to do all your calculations outside or Quicken so you have your information at hand for your Adds.

2nd paragraph:

There is no step up in the basis of shares held inside an IRA, so a simple Transfer should fill the bill here. Capital gains reports should reflect the real profit arising from a sale - proceeds minus purchase basis - but that's pretty much irrelevant as only distributions out of the IRA get taxed, and they are taxed at "ordinary" rates, absent any "basis" in the IRA, (i.e., after-tax contributions).

Tom Young

Unfortunately the Remove function works on a FIFO basis - you should check that in Q2014 but I'm pretty sure it works that way in Q2013 - so a Remove action for 19.908 shares would end up with all of those shares coming out of the earliest lot. So the first lot would be 19.814 shrs @ $23.624 and the second lot would remain at .094 shrs @ $30. If a lot of your stocks are held in multiple lots simple Remove of half the shares would end up with a lot of "invisible" changes in the basis of your half of the shares.

Rick Pula

1st paragraph:

The Remove/Add process is probably the best way of handling this. If you are in a community property state you'd do a "Remove" of all the stock then Add back all the stock, on a stock-by-stock basis. I'd suggest entering the "Date acquired" as a year and a day prior to your spouse's death since the inherited stock is considered "long term" irrespective of the time you jointly owned it or how long you own it after the date of death.

If you are in a non-community property state the process is more difficult because only half of the jointly held stock receives the step up and the "Remove" action works on a FIFO basis. You can still do one Remove action for all the stocks, but you need to do 2 "Adds" for each lot of stock, half with the original basis and "Date acquired" and half with the stepped up basis and the new "Date acquired." Best to do all your calculations outside or Quicken so you have your information at hand for your Adds.

2nd paragraph:

There is no step up in the basis of shares held inside an IRA, so a simple Transfer should fill the bill here. Capital gains reports should reflect the real profit arising from a sale - proceeds minus purchase basis - but that's pretty much irrelevant as only distributions out of the IRA get taxed, and they are taxed at "ordinary" rates, absent any "basis" in the IRA, (i.e., after-tax contributions).

Tom Young

Tom, good to work with you again.  Yes we must be in a non community state cause when I look at the brokerage statements, it looks like they did what you describe.  Shares were reduced by 1/2.  Then they added back a total of stock at the new value.  So I was wondering, if I follow the brokerage statement set up and remove 1/2 of the shares from each fund/stock, would that not end up the same way in quicken?  An example of 2 lines for 1 of the stocks is:
Stock A    5/28/96   39.722 shrs  @ 23.624 = 938.43 cost basis
Stock A    4/1/97         .094 shrs @ 30   = 2.82  cost basis

The new information on the statement is:
Stock A  5/28/96  19.861 shrs @23.624  = 469.21
Stock A  4/1/97        .047 shrs @ 30 = 1.41

So I am thinking that if I use the "remove shrs" function in quicken, it will reduce all the shares by half for each transaction just like the brokerage statement and still keep the original cost.  Then all I would have to do is add back the shares at the new value.  Every stock/fund will be reduced by 1/2 since it was a joint account in NJ.  I am thinking that Quicken would do the same thing.  If I cut the shares in 1/2, then each transaction should be reduced by1/2 the shares for each transaction automatically.  Is that the way quicken would do it?   This would avoid the 2 adds you suggested which would be a lot of re-recording in some cases as their are years of reinvested dividends.  For some reason, I am thinking quicken would actually reduce the shares for each transaction, keeping the same original cost and thus avoid all the entry work.

unknown

1st paragraph:

The Remove/Add process is probably the best way of handling this. If you are in a community property state you'd do a "Remove" of all the stock then Add back all the stock, on a stock-by-stock basis. I'd suggest entering the "Date acquired" as a year and a day prior to your spouse's death since the inherited stock is considered "long term" irrespective of the time you jointly owned it or how long you own it after the date of death.

If you are in a non-community property state the process is more difficult because only half of the jointly held stock receives the step up and the "Remove" action works on a FIFO basis. You can still do one Remove action for all the stocks, but you need to do 2 "Adds" for each lot of stock, half with the original basis and "Date acquired" and half with the stepped up basis and the new "Date acquired." Best to do all your calculations outside or Quicken so you have your information at hand for your Adds.

2nd paragraph:

There is no step up in the basis of shares held inside an IRA, so a simple Transfer should fill the bill here. Capital gains reports should reflect the real profit arising from a sale - proceeds minus purchase basis - but that's pretty much irrelevant as only distributions out of the IRA get taxed, and they are taxed at "ordinary" rates, absent any "basis" in the IRA, (i.e., after-tax contributions).

Tom Young