When your spouse dies, the U.S. government gives you some financial benefits to try to help ease your financial burden. One of these benefits is that if you are listed as the beneficiary of your spouse’s investment account (also called brokerage account), you are allowed to receive what’s called a “step-up in basis.”

To understand why this is a benefit, you first have to understand what “cost basis” is. In short, cost basis is how much you originally paid for an asset, such as stock. A step-up in basis adjusts the cost basis of an inherited asset to its (typically) higher market value on the date of the owner’s death. This adjustment matters because the taxes owed when the asset is sold depend on the cost basis. Receiving a step-up in basis means that when you sell the asset, you will pay less in taxes than you otherwise would have.

Example of a Step-Up in Basis:

When Bob died, his wife Betty inherited his brokerage account. He had bought 100 shares of Apple stock at $2 per share 15 years ago, for a total of $200, meaning his cost basis was $200. When Bob died, the stock was worth $200 per share, for a total of $20,000. If Bob had sold his shares while still alive, he would’ve had to pay taxes on $19,800 ($20,000 – $200). However, if Betty decided to sell his shares, because the cost basis was increased to $20,000, she wouldn’t have to pay any taxes.

Step-Up in Basis in Community Property States

In community property states, surviving spouses receive a full step-up in basis on all community property (assets accumulated during marriage) no matter whose name is listed as the owner. The community property states are California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin.

Step-Up in Basis in Common Law States

In all other states, also called common law states, surviving spouses receive a full step-up in basis only for assets that were owned solely by the deceased spouse. Jointly owned property, such as stock in a joint brokerage account, receives half the step-up in cost basis compared to what it would receive in a community property state. Assets owned solely by the surviving spouse do not receive a step-up in basis.

Conclusion

If you inherited a brokerage account from your spouse, make sure to review the cost basis to confirm that you received the correct step-up in basis you are owed, based on if you live in a community property or common law state. Custodians have been known to make mistakes and not provide the correct step-up in basis.

Disclaimer: While I’m studying to be a financial planner, I am not yet an expert in inherited accounts and am merely passing along information based on my understanding of them.