Wealth Preservation_Flipbook_2024

Rules for Couples In the nine states with community property laws, the surviving spouse typically receives a full step-up in basis on joint assets after the first spouse dies. In most other states, the step-up is on one-half of the asset’s value. Consider this example: A couple purchased a house together for $40,000. When the husband dies, the house is worth $200,000. In a community property state, the wife’s basis in the house typically would rise to $200,000, the value at the time of her husband’s death. If she sold the house for $200,000, she would not owe capital gains tax on the sale. In most other states, the wife’s basis would typically rise to $120,000 — $20,000 for the husband’s original portion and $100,000 for the current value of the wife’s share. If the wife sold the house for $200,000, she might be liable for capital gains tax on $80,000 ($200,000 less $120,000 basis). However, she may be eligible for a one-time exemption on selling a principal residence. If she owns the house until her death, the basis would step up again for her heirs. Note: Alaska adopted a community property system in 1998, but it is optional. A Change in Gifting Strategy In the past, some people with large estates would gift highly appreciated assets in order to keep the assets out of their estates. The step-up in basis does not apply to gifts, so it generally would be more tax-efficient to hold on to the asset until the original owner passes away. In the example above, if the couple gave the house to their children during their lifetimes when it was valued at $200,000, the $160,000 increase in value since the time of purchase might be subject to the capital gains tax.