Losing a spouse is undoubtedly one of the most difficult periods of someone’s life.  Widows should allow themselves time to heal emotionally from the loss, to then be in a better place to make major investment decisions.  However, there are a few investment scenarios that have time-sensitive deadlines within the first nine months of the loss.   Here are two financial steps that affluent widows should consider that could save millions.

Take advantage of federal lifetime estate exemption portability

The Tax Cuts and Jobs Act of 2017 raised the estate tax exemption and scheduled another increase beginning in 2020.  The new legislation eliminates federal estate taxes on amounts under $11.58 million, meaning individuals can give up to $11.58 million each in gifts over their lifetime without having to pay gift tax. This is referred to as a federal lifetime exemption.

Any gifts made during lifetime or at death in excess of the individual’s exemption will be taxed at 40%. The federal lifetime exemption is “portable” which means a surviving spouse inherits any unused exemption at their spouse’s death. In order to “inherit” the exemption, the surviving spouse must make the election by filing an estate tax return (Form 706) within nine months of the decedent’s death. For couples with large estates, this step could save upwards of $4.5 million in estate tax.

Document a step-up in cost basis

Cost basis is the original value, often the purchase price, of an asset. When an item is sold, there is a tax on the profit (difference between the purchase price and sale value) – known as the realized gain. The realized gain on most assets held more than one year is taxed at 0%, 15%, or 20%, depending on taxable income, with collectibles taxed at 28%.

When an asset is inherited or received as a result of death, the asset should receive a “step-up” in the cost basis. This means the recorded purchase price is adjusted to the fair market value at the date of the decedent’s death.  This not only applies to assets held solely by the decedent, but also assets held jointly. The executor must document the cost-basis adjustment on the estate tax return which is due within nine months of the spouse’s death in order to save on taxes.

For example, let’s say you and your spouse purchased a piece of artwork for $50,000 decades ago and titled the piece jointly, which means each spouse has a cost basis of $25,000. Your spouse passed away several years ago when the piece was valued at $200,000. Now the piece is worth $300,000 and you’d like to sell it. If you failed to step-up the basis and used the original purchase price as your cost basis, your capital gain would be $250,000, resulting in a tax of $70,000. When, upon your spouse’s death, their cost basis on the artwork should have increased to $100,000, resulting in a total cost basis of $125,000 and a capital gains tax of $49,000 upon the sale.

Act within the first nine months

The common steps after suffering a loss of getting multiple copies of the death certificate, renaming beneficiaries on all insurance policies, retirement accounts and other financial accounts, updating a will and estate documents, and contacting the Social Security Administration are very important.  But educating yourself around the federal lifetime estate exemption portability and cost basis step-up will ensure that you don’t suffer tax implications from the loss.

Advisors should counsel their clients on these key deadlines, as we do at CI Budros Ruhlin Roe.  If you or someone you know is looking for some assistance with wealth and tax planning, we would welcome the opportunity to discuss how we can help you achieve your goals.

Samantha Anderson, CFP®

Wealth Manager


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