Q. I have a question about the cost basis for property inherited at the death of a surviving spouse. My lawyer said the cost basis is equal to the sum of one-half of the fair market value at the death of the first spouse and one-half the fair market value (FMV) at the death of the surviving spouse. But I’ve also read the cost basis is equal to the FMV at the death of the surviving spouse. In my situation, the property is held in a revocable family trust and the children inherit the property.
A. There are a couple of issues to understand in your scenario.
When an appreciated asset is inherited, the person inheriting the asset receives a step-up in basis so that the appreciation that took place during the deceased person’s lifetime would not be attributed to the person inheriting the asset, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
So, she said, assuming a husband and wife owned real property that appreciated in value, the surviving spouse would receive a step-up in basis at the death of the first spouse.
Then when the second spouse dies, the children inheriting the property receive a step-up in basis for the entire property equal to the fair market value of the property as of the date of the death of the second spouse, Whitenack said.
She offered this example: Assume the husband and wife purchased real property for $400,000 and no improvements to the property are made. At the time of the husband’s death, the fair market value of the property is $500,000. The wife receives a step-in basis of the husband’s 50 percent interest in the property, which is now valued at $250,000. She also retains her cost basis in the property which is $200,000 (half of the $400,000 purchase price) for a total cost basis of $450,000. This would be her cost basis if she sold the property during her lifetime.
“If the wife retains the property at the time of her death and the property is still worth $500,000, the children who inherit the property would get a step-up in basis of $500,000,” Whitenack said. “Assuming that the property is worth $600,000 at the time of the wife’s death, the children’s step-up in basis would be $600,000.”
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