July 2009
The Cost Basis Headache
Recently, a new client came to Silver Oak with a portfolio of stocks, bonds and mutual funds. Some were purchased, some inherited and some received as gifts over many years. The statements they provided to aid in the cost basis research showed incomplete data, only accurately showing holdings that were purchased with the current brokerage company. The client was able to provide other information, like the date of death for some inherited assets. Even when good records are kept, however, sifting through all the paperwork can result in days of paper cuts and more confusion than answers.
Cost basis, by definition, is how much you’ve spent on a certain asset. For investments like stocks and mutual funds, that includes the initial purchase and any reinvestments (dividends or capital gains that were used to purchase additional shares of the investment). The cost basis number is used for tax purposes, and is only necessary for taxable accounts. When an investment is sold, the difference between the proceeds of the sale and cost basis is called the “realized gain.” You also need to know when you purchased the investment, because lower tax rates apply to a sale if it has been owned for more than one year.
Cost basis can certainly be a headache. Scenarios like the one above are quite common with our clients, and determining which assets came from where can be a frustrating, and sometimes impossible, task. Often, the most appealing solution in these circumstances is for the owner to hold the asset until their death, when it will be included in their taxable estate and receive a step-up in basis to fair market value.
Today when a person dies, all their assets get “stepped up” so their cost basis becomes the date of death or alternate valuation date value. Any untaxed appreciation effectively disappears. New rules under The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) would change this process. Unless modified, as of January 1, 2010 EGTRRA dictates assets would be passed on to heirs with a “modified carry over basis.” Like assets that are gifted prior to death, inherited assets would initially use the decedent’s basis.
The estate can then increase the decedent’s basis of assets transferred to non-spouse beneficiaries by up to $1.3 million and increase basis to a surviving spouse by $3 million. A beneficiary receiving highly appreciated assets, perhaps real estate or a small business (exceeding the allotted basis increase amount) will be required to use the decedent’s original basis for the inherited assets and pay tax on any capital appreciation at sale.
General opinion is that the administration will modify or defer the estate tax repeal prior to 2010, but the effects of the current law should still be understood.
As evidenced by frequent tax law changes, the cost basis headache is not likely to end soon. As your financial advisor, we’ll do our best to help you through the cost basis melee. If you have any questions or would like assistance in figuring out your cost basis, please contact us at 503-242-1715.
Silver Oak Community Resource List
Thanks to all our clients and friends who sent contributions to be added to our First Annual Silver Oak Community Resource List. Our goal was to build a list of referrals for professionals and service providers that someone has (happily) used before and to support local businesses in this challenging economy.
Included with this newsletter is the list in hard copy. As noted on the last page, we want this to be a work in progress, so if you have any corrections or additions please send them to Linda.
Office Remodel
As part of our lease renewal, we will be getting new carpet, paint and another interior office. Due to the need to pack everything up before the work, and then putting it back in place afterwards, we will officially be closed for the two weeks from August 5 through 18.
The contractor assures us we will still have phone and computer service during the work and we will try to return any critical calls during that time. We will also provide another contact phone number on our voice mailboxes.
We will also have some extra office furniture as part of this process, so please contact Jessi if you need a desk, chair, or filing cabinet.
Quote for the Day
"Investing is harder work than it seems, harder than the advertisers represent it to be. Successful money management requires discipline and patience. It also requires two things I have not thought of before. It requires a tolerance for discomfort when things seem not to be working, and it requires an ability to avoid over-confidence when things seem to be going well." -Anonymous
Upcoming Workshops
The next "Investment Boot Camp" programs will be held:Saturday, September 12, 9:30 to 11:30 am
Wednesday, October 22, 4:00 to 6:00 pm
Tuesday, August 26, 4:30 to 6:30 pm
Seating is limited; please RSVP to Linda at (503) 242-1715 or register on our website.
Planner Updates
Ben Gilbert will be out of the office for several weeks around the beginning of October due to the pending arrival of his second child. He and his wife Carrie are the proud parents of Logan, age 3.
Steve Hewitt traveled to Ireland for 10 days in July, and has great stories to share.
Deborah Thomas will be traveling in Europe for four weeks in September and October, a surprise anniversary gift from her husband John. They will go to Ireland, Italy and Paris.
Jessi Howe is shopping for the purchase of her first home so watch this space for an invitation to a house-warming party!