What happens to joint capital losses if one spouse dies?October 6, 2011: 5:05 AM ET
We file joint tax returns every year. In the last two years we accumulated some long-term loss carryovers, which under ordinary circumstances will take several years to use up. What happens to the carryovers if one of the spouses dies? -- A.G., Indiana
From the perspective of the Internal Revenue Service, capital losses belong to the person who incurred them. In the case of a jointly owned brokerage account, the losses are split evenly between the owners. So following the final joint tax filing after the death of a spouse, the survivor may carry forward only half of the couple's losses from any joint accounts or property.
"If one of the spouses passes, half of the losses die with that person," says Elda Di Re, Partner and Leader, Personal Financial Services at Ernst & Young.
That means if a spouse who is severely ill has significant capital losses, the couple may wish to utilize those losses to minimize capital gains ("use it or lose it", to use the dry humor of accounting) by selling appreciated assets and offsetting the gains with loss carryforwards.
"Typically I recommend that clients not realize capital gains for the sole sake of using their capital loss carryforward. But if there is concern for the longevity of the owner of the capital loss carryforward, then there could be significant tax planning for the utilization of those losses," says Di Re.
To retain the full capital loss carryforward the loss would have to result from assets held in the name of the surviving spouse, rather than a joint account, points out Tim Spiess, Partner and Chairman, Personal Wealth Advisers, at EisnerAmper.
Capital losses are locked in when the loss is taken, so transferring remaining assets to the healthy spouse will not help retain the dying spouse's share of capital losses. Besides, a decedent's appreciated assets receive a step-up in basis to the value at the time of his or her passing, an important tax advantage for heirs.
— Allan Chernoff
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