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Tax advice for the fatally ill

By Jennie L. Phipps ·
Tuesday, April 30, 2013
Posted: 4 pm ET

If you and your spouse are dealing with the pain of a soon-to-be-fatal illness, here is a retirement planning step the two of you might think about taking. While thinking about money probably seems painful at this point, saving a surviving spouse a considerable amount could be thought of as a final act of love that gives the surviving spouse a more secure retirement.

Consider shifting ownership of assets that you've held a long time that have risen significantly in value to the ailing spouse. Anna Pfaehler, a Certified Financial Planner professional with Palisades Hudson Financial Group in Scarsdale, N.Y., explains the rationale this way:

"Let's say the wife owns stocks have that appreciated greatly over the years. She can give those stocks to her husband tax-free. When he dies, she will inherit the stocks and get a step-up in basis to the current market value. If the wife chooses, she can sell the stocks immediately and she won't pay any capital gains tax," Pfaehler says.

This approach also can work with a home that you bought decades ago in an area where home prices have appreciated significantly. If a couple owns the house jointly and a surviving spouse inherits her late husband's share, there is no step-up in value.

But if the couple transfers the house to the husband while he is still living, there is no gift tax and when the husband dies, the wife gets a step-up in basis that will allow her to sell the house without paying capital gains tax.

Pfaehler emphasizes that it is very important to have a will in place making it clear that the surviving spouse inherits everything -- even when state law makes spousal inheritance the default.

She also advises paying off any mortgage before making the transfer so the bank has no claims.

In the case of same-sex couples, the transfer is a taxable gift and subject to gift taxes, but there is still a step-up in basis. Same-sex couples also will face estate taxes if their assets are above $5.2 million. For most people, that isn't a problem, Pfaehler says, but "It does add another wrinkle to consider."

There is no estate tax when conventional couples inherit from each other.

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