Remember tax-related documentation tasks for surviving spouses

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Clients who have lost their spouses are often overwhelmed and hardly want to think about documentation for tax purposes, so financial advisors understandably might put off tax-related adjustments for a few months.

But advisors shouldn’t wait too long to encourage clients who have lost their spouse to identify and record the allowable partial step-ups in their assets’ cost basis of unrealized capital gains. The tax code allows surviving spouses to take that partial step-up of the cost basis on certain assets.

“It’s important to inform the custodian. Otherwise it may get confusing,” says Shomari D. Hearn, an advisor and vice president with Palisades Hudson Financial Group LLC in its Fort Lauderdale, Fla., office.

A simple example shows the advantage of making sure that the information is recorded accurately around the time of death when it is still fresh in everyone’s mind, he says.

A couple may have owned stock worth $300 a share, which they acquired at $100 a share. If they had sold it prior to the spouse’s death, they would have realized and paid taxes on per share $200 in capital gains.

But, with the death of a spouse, the widow or widower is allowed a 50% step-up of the cost basis. If the surviving spouse sells the stock after the step-up is identified and recorded with the custodian, the client will only pay taxes on $100 a share in capital gains.

Kathleen M. Rehl agrees that advisors must make sure that widows and widowers record their allowed partial steps-up with their clients’ financial institutions and custodians.

Rehl, who owns Rehl Financial Advisors in Land O’Lakes, Fla., wrote “Moving Forward on Your Own: A Financial Guidebook for Widows” (Rehl Financial Advisors, 2010). She consults with advisors nationwide about best practices for helping those who have lost their spouses.

But in addition to adjusting the cost basis, the unrealized capital gains for their stocks, bonds and other financial instruments, surviving spouses also must record a partial step-up of the cost basis of their unrealized capital gains of their home, she says.

The surviving spouses should have their homes appraised as of date of their partner’s death. The documentation will help the surviving spouses calculate the allowable partial step-up for the cost basis of the capital gains if and when they sell the house.

“The house piece is one that people tend to forget,” Rehl says.

Miriam Rozen is a staff writer for Texas Lawyer who writes about financial advisors.

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