Maximizing step-up basis between a married couple to minimize capital gains.

The cost basis of property transferred at death receives a “step-up” in basis to its fair market value. This eliminates an heir's capital gains tax liability on appreciation in the property's value that occurred during the decedent's lifetime.

Caller: My question is, my husband and I own investment property separately. In other words, he own a couple of properties under his name and I own one. Do I need to make two separate trusts if I want to do a revocable living trust, do I need to do a separate one?

Attorney Tom Olsen: If you want to keep your assets separate, the answer is yes. Most married couples that we do trusts for have been married for a long time and they own everything jointly, so we do a joint living trust where you put all their joint assets into the joint living trust. If you or your husband have an interest in keeping your assets separate and apart, then yes, you would have your trust, he would have his trust.

Caller: Right, but I'm talking about to avoid a capital gain tax, do I need to do that or no? If he died before me, does that mean whatever his property that he owns that I have to pay capital tax when he dies?

Attorney Tom Olsen: There is a good provision left in the Internal Revenue Code called the step-up basis. It says if your husband owns a piece of property and he passes away and you inherit that piece of property, your basis for capital gains tax purposes will be the value at the date of his death. If he dies owning property that you inherit from a capital gains tax perspective, it's good news. If you guys own that property jointly, you would get a step-up basis on 1/2 the value of the property. If he owns that in his name only and you inherit the whole thing upon his death, you'll get a step-up basis on a whole thing.

Caller: Then I don't have to worry about that capital gains tax? I'm not sure I understand that. Would you explain to me? That's the reason what-- I talked to one of the attorneys and this is what she suggests me to do is separate in order for me to avoid a capital gain tax when he dies.

Attorney Tom Olsen: Is your husband older than you?

Caller: Yes.

Attorney Tom Olsen: Likely, he's going to pass away before you. For the purpose of minimizing capital gains taxes, it would be best if he left those properties in his name only and that you would inherit them upon his death using a living trust or another tool.