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Question:

My husband passed away. I owned stocks in only my name. Are the stocks part of his estate?

Response:

No. What’s yours is yours and what was his is in his estate.

In terms of taxes, this result is both good and bad. It means that the property in your name alone will not be subject to any estate tax on your husband’s estate. But it also means that it will not get a step-up in basis, so your capital gain will be higher when and if you sell the stock. In most cases, capital gain is the difference between what you paid for the stock — the basis — and what you receive for selling it. However, when an owner dies, the basis gets adjusted to its value on the date of death. This “stepped-up” basis usually means that there will be less capital gain and a lower tax upon the sale of the stock. Unfortunately in your case, since your husband was not a co-owner of the stock, it did not receive a step-up in basis.

At least that’s the rule in most of the country. Nine states, however, are “community property” states where the result may be different. These are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. While each state’s rules are a bit different, in these states property acquired after marriage is considered to belong to both spouses, except for inherited property. So, depending on when and how you acquired the stock, if you live in one of these states it may be considered for tax purposes to have belonged one-half to your husband. You still would not have to probate his estate to establish your continuing ownership, but you could benefit from a step-up in basis. Surprisingly, this step-up may be for the entire value of the stock on your husband’s date of death, not just one half.

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