Karen, a recent widow, reached out to me for help with getting financially organized after her husband passed away. Her husband had a broker, but Karen didn't really know him. So she hired me and together we got to work on her Survivor's Financial Plan, a tool I use to review the financial, retirement, estate, investment, and insurances of a new widow.
The Cost Basis Never Stepped Up
As I got to reviewing her investment statements, I immediately noticed something was wrong - the cost basis of the stocks in the joint account were never stepped up to her husband's date of death. The way the tax code works, if a spouse passes, the deceased's share in the cost basis in those shares is stepped up to the value on the date of death. This is important because when you go to sell a stock, the difference between the fair market value and the cost basis (the gain) is the income tax due. This could be extremely costly if she went to sell the stocks, she would have owed a substantial amount of money in income taxes, since she had a substantial gain due to the low cost basis in the stocks. We went back to the brokerage firm to correct. Why did this happen?
Having A Joint Account, But Different Last Names Was the Ultimate Culprit
At the majority of investment brokerage firms, the cost basis is automatically stepped-up on the date of death. However, this is not always the case when the deceased and the surviving spouse have different last names as was the case with my client. She and her husband were married but she kept her last name. In that case, the brokerage firm didn't automatically step up the basis, but rather needed further instruction from the deceased husband's broker - something the broker must have overlooked.
It's often the little things that add up to big things in the world of financial planning and investing. Here, the broker's oversight, if left undetected could have cost Karen a pretty penny in unnecessary income taxes. Always double check the cost basis is stepped up in the appropriate accounts.