How is the cost basis determined for stock jointly held with a spouse when one dies?

[hjbnaples]

The basis is generally the price on the day of death of the owner.  Is that basis allowed for stock that is jointly held with right of survivorship?

[DJS · Accepted solution]

The situation is different if you live in a community property state.

In a community property state only ½ of the community property is included in the decedent spouse’s estate. However, the entire community property asset gets a step-up (or down) to FMV at the date of death. Community property rules only apply to a husband and wife legally married under state law.

Example: Carmen and Electra are husband and wife. They live in Wisconsin (a community property state). Electra just died. They owned a home (community property) valued at $500,000 as of Electra’s date of death. 

Solution: $500,000 – they are married, they live in a community property state, so Carmen gets a full step-up in basis upon his spouse’s death.

The community property states are: Arizona, California,Idaho,Louisiana,Nevada,New Mexico,Texas,Washington, Wisconsin.

This is discussed in IRS publication http://www.irs.gov/pub/irs-pdf/p555.pdf, whch says, in part:

Death of spouse.

If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property.For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule does not apply to registered domestic partners).

[marisakdiaz]

(SPAM)

[Critter1]

There is something called a stepped up basis at death. So for instance you had a stock you purchased for $100 in this joint account. It is worth $200 at the date of death of the decedent. 

The Original basis is $50 each since it is divided in half (100/2)

The surviving spouse inherits the decedent's half at the value as of date of death. So the inherited basis is $100 (200 / 2).

The surviving spouse basis is now $150 ( 50 orig + 100 step up) . 

Recompute the basis for all holdings in the account or see if the broker has done it already for you. 

[ScruffyCurmudgeon]

By the way, the rule on cost basis of an estate is actually not that simple. 

The Cost Basis and the value of the asset must be determined by taking either the fair market value ("FMV") per share on the date of death, or the market value six months later if the alternate valuation date is elected by the Personal Representative ("Executor"). The alternative date may be chosen if the entire estate is worth less at the alternative date. The alternate valuation date can only be selected for the estate as a whole, not on a stock-by-stock basis.  Even if an inherited stock's price is higher at the six-month mark, if the Personal Representative selects the alternate valuation date, you use the higher value. 

The FMV is calculated as the average of the high and low trading prices for the date of death [or the date 6 months later as the alternative].  If the date falls on a weekend, use the average of the Friday and Monday average trading prices.

In either case, it is the FMV chosen that becomes the "stepped-up" basis.