Can we use this strategy to avoid capital gains taxes?


Q. A good portion of my non-retirement assets are stocks and mutual funds held jointly with my spouse. If one of the spouses is terminally ill, does it make tax sense to make the terminally ill spouse the primary owner of the shares and bonds and the surviving spouse the beneficiary? So when the primary owner dies, the surviving spouse who is the beneficiary can benefit from a base mark-up and avoid paying capital gains if they sell the investments. For example, one of them bought Facebook when it cost $ 40 per share as roommates. Facebook now costs $ 300 a share and the registration has gone from co-owner to terminally ill spouse. The primary owner dies and Facebook now costs $ 350 per share, the surviving spouse who is the beneficiary pays capital gains not on the original purchase price of $ 40 but on the $ 350 value of the share.

– try to save

A. It’s a smart move to save on capital gains taxes.

And it is legal.

When you inherit a property from someone, you receive a base increase.

“The basis is tax, for your expenses. As a result, inherited assets have a basis equal to market value on the date of death, ”said Bernie Kiely, Chartered Financial Planner and Chartered Accountant at Kiely Capital Management in Morristown.

He said that when a living person donates property to you, your base is the donor base. So a giveaway can come with a hidden tax liability, he said.

If you have a brokerage account jointly owned by you and your spouse, you each have an undivided interest in the account, he said. If your spouse dies, the surviving spouse inherits the deceased’s interest in the account. This translates to an increase in the base for half of the account, he said.

You ask if the healthy spouse can donate half of the account to the terminally ill spouse in order to receive a base increase for the entire account.

“Yes, it’s perfectly legal,” Kiely said. “Spouses can make unlimited transfers between them without gift tax. When the terminally ill spouse dies, the survivor inherits the account with a tax base on the date of death.

Of course, there is a “but”.

The law prohibits an increase in base if the property has been offered within a year of their death, Kiely said.

“By requiring the donee spouse to survive for at least one year after the transfer, IRC section 1014 (e) limited the possibility of a tax-free transfer to a terminally ill spouse and then receiving of these goods on the death of the terminally ill patient. spouse with an increase in the base of the property, ”he said. In addition, the Internal Revenue Service has also ruled that IRC section 1014 (e) will apply to parts of property that are held in a joint revocable trust funded by assets held by grantors as tenants. in their entirety. “

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for‘s weekly electronic newsletter.


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