This post outlines the basics of the cost basis step-up for stocks and securities in California,
When married couples think about estate planning, they often focus on their home, living trust, and who will inherit their assets. But for couples who own stocks, mutual funds, ETFs, or other investments, how those investments are owned can have significant tax consequences after one spouse dies.
California’s community property laws can provide an especially valuable tax benefit: when qualifying community property receives a cost basis adjustment at the death of one spouse, both spouses’ halves of the property generally receive a new tax basis based on the property’s fair market value at the date of death.
This can substantially reduce—or sometimes effectively eliminate—the capital gain that accumulated before the first spouse’s death.
For married couples with investment portfolios, understanding this rule can be an important part of working with a trust attorney in San Diego or San Diego living trust attorney to structure an estate plan.
What Is Cost Basis?
Your cost basis is generally the amount you paid for an investment, adjusted when required by law. Publication 551 (12/2025), Basis of Assets | Internal Revenue Service
For example, suppose you purchase stock for:
$100,000
Years later, the stock is worth:
$300,000
If you sell the stock for $300,000 while your basis remains $100,000, you generally have a:
$200,000 capital gain
That gain may be subject to federal and California capital gain taxes.
But the calculation can change dramatically when property receives a basis adjustment following an owner’s death.
What Is a Step-Up in Cost Basis?
Under Internal Revenue Code Section 1014, property acquired from a deceased person generally receives a basis equal to its fair market value at the date of death, subject to important exceptions and special rules.
When an appreciated asset receives a higher basis at death, this is commonly called a “step-up in basis.”
Suppose an investor purchased stock for $100,000 and it was worth $300,000 at the investor’s death.
If the stock qualifies for a basis adjustment to $300,000, a beneficiary who later sells it for approximately $300,000 would generally have little or no capital gain attributable to the appreciation that occurred before the investor’s death.
The IRS describes the general rule for inherited property as using fair market value at death, subject to applicable exceptions.
For married couples in California, however, community property can make the rule even more powerful.
California Community Property Can Receive a Full Basis Adjustment
California is a community property state.
For federal income tax purposes, when spouses own qualifying property as community property and one spouse dies, the basis of the entire community property asset generally becomes its fair market value at the date of death, assuming the applicable requirements are satisfied.
In other words, the basis adjustment is generally not limited to the deceased spouse’s one-half interest.
The surviving spouse’s one-half interest generally receives the adjustment as well.
The IRS specifically explains that in a community property state such as California, the total value of qualifying community property—including the surviving spouse’s share—generally becomes the basis of the entire property when one spouse dies, provided at least half of the community property interest is includible in the deceased spouse’s gross estate.
This rule can be extremely important for long-held stocks and securities that have appreciated substantially.
Example: A California Couple With $1 Million of Stock
Consider a married couple living in Del Mar.
Over many years, they accumulated a diversified investment portfolio consisting of stocks, ETFs, and mutual funds.
Their original adjusted cost basis is:
$300,000
At the death of the first spouse, the portfolio is worth:
$1,000,000
Assume the entire portfolio qualifies as community property and satisfies the federal requirements for the community-property basis adjustment.
After the first spouse’s death, the new basis of the portfolio would generally be:
$1,000,000
That means approximately $700,000 of appreciation that occurred before the first spouse’s death is no longer built-in taxable capital gain for purposes of calculating gain on a subsequent sale.
If the surviving spouse later sells the investments for $1,020,000, the taxable gain would generally be based on the difference between the $1,020,000 sale price and the new $1,000,000 basis—not the original $300,000 basis.
That could mean a gain of approximately:
$20,000 instead of $720,000.
This simplified example demonstrates why asset characterization can matter so much in California estate planning.
Community Property vs. Joint Tenancy: An Important Difference
One of the biggest misconceptions is that all property owned jointly by a married couple receives the same basis treatment.
It does not.
The tax consequences can differ depending on whether an investment account is properly characterized as community property or is instead held under another form of ownership.
California’s Franchise Tax Board illustrates this distinction. For property owned as community property with a deceased spouse, it states that the basis is the fair market value of the total property at death. For property held in joint tenancy, the calculation generally combines the fair market value of the deceased spouse’s half with the existing basis of the surviving spouse’s half.
Consider the same portfolio:
- Original basis: $300,000
- Fair market value at first spouse’s death: $1,000,000
If the portfolio qualifies for the community-property adjustment, the basis may generally become:
$1,000,000
But if only the deceased spouse’s one-half interest receives a basis adjustment while the surviving spouse retains the original basis in his or her half, the resulting basis could instead be approximately:
- Surviving spouse’s original half-basis: $150,000
- Deceased spouse’s adjusted half-basis: $500,000
- New total basis: $650,000
That is a potential $350,000 difference in basis.
For a highly appreciated investment portfolio, the distinction can have substantial tax consequences.
Does a Living Trust Prevent the Step-Up in Basis?
A common concern is that transferring stocks or securities into a revocable living trust will prevent them from receiving a basis adjustment at death.
Generally, holding an asset in a properly structured revocable living trust does not eliminate the basis adjustment.
The important issues include the nature of the trust, whether the asset is included in the deceased spouse’s estate for federal tax purposes, and whether the property qualifies as community property.
This is one reason married couples should not look at a living trust merely as a probate-avoidance document.
A properly designed estate plan should also consider:
- How investment accounts are titled
- Whether assets are community or separate property
- How the trust characterizes marital property
- Who owns each investment account
- Beneficiary designations
- Tax basis considerations after the first spouse dies
- Administration of the trust following death
A San Diego living trust attorney can coordinate these issues as part of the overall estate plan.
What Types of Investments Can Benefit?
The basis rules can potentially apply to many capital assets, including:
- Individual stocks
- Exchange-traded funds (ETFs)
- Mutual funds
- Bonds and certain other securities
- Brokerage accounts
- Closely held business interests
- Investment real estate
The specific tax treatment depends on the asset and the circumstances.
Retirement accounts such as IRAs and 401(k)s are different. Because distributions from traditional retirement accounts are generally governed by income-tax rules applicable to retirement assets, they should not be treated like an ordinary taxable brokerage account for step-up-in-basis planning.
What Records Should the Surviving Spouse Keep?
After the first spouse dies, documenting the value of investments can be extremely important.
For publicly traded stocks and securities, historical market values can often be established relatively easily. But the surviving spouse or successor trustee should still maintain clear records showing:
- The date of death
- Investment account statements
- Number of shares owned
- Fair market value of each security
- Original cost-basis information
- Whether the asset was community or separate property
- Any valuation information used during trust or estate administration
Those records may become important years later when the surviving spouse sells the investment.
Brokerage firms may maintain basis information, but families should not assume that every brokerage account will automatically reflect every legal or tax adjustment correctly.
Why Asset Characterization Matters in California Estate Planning
California community property law creates planning opportunities that do not exist in the same way in many non-community-property states.
A couple may have identical investment portfolios but receive very different tax results depending on how those assets are owned and characterized.
That makes it important to review investment accounts when establishing or updating a living trust.
An estate planning attorney in Del Mar or San Diego can help married couples evaluate how their brokerage accounts and other assets fit within their overall estate plan.
The goal is not simply to decide who receives the investments.
It is also to make sure the ownership structure, trust, and supporting documents work together as intended.
Estate Planning for Stocks and Investment Accounts in San Diego
If you own appreciated stocks, mutual funds, ETFs, or other investments, your estate plan should address more than who inherits the account.
For married California couples in particular, properly characterizing assets as community property when appropriate may have important income-tax consequences following the death of the first spouse.
At San Diego Trust Lawyer, we help individuals and families create and maintain living trusts and comprehensive estate plans designed around their assets, family circumstances, and goals.
If you are looking for a trust attorney in San Diego, a San Diego living trust attorney, or assistance with estate planning in Del Mar, we can help you review how your home, investment accounts, and other assets fit into your estate plan.
Schedule a consultation with San Diego Trust Lawyer to discuss your living trust and estate plan.
Frequently Asked Questions
Do stocks receive a step-up in cost basis when someone dies?
Stocks inherited from a deceased owner generally receive a basis determined by their fair market value at the date of death, subject to exceptions and other tax rules. For qualifying California community property, the basis adjustment can generally apply to both the deceased spouse’s half and the surviving spouse’s half.
Does the surviving spouse’s half of community property get a step-up in basis in California?
Generally, yes, when the requirements of the federal community-property basis rule are satisfied. The IRS states that the total value of qualifying community property, including the surviving spouse’s share, generally becomes the basis of the entire property following the death of a spouse.
Does joint tenancy get the same full step-up as community property?
Not necessarily. California tax guidance distinguishes community property from joint tenancy. With qualifying community property, the total property’s basis can generally become fair market value at death, whereas joint-tenancy property can have a different basis calculation.
Do stocks in a living trust still receive a step-up in basis?
Placing investments in a revocable living trust does not automatically prevent a basis adjustment at death. The result depends on the trust structure, ownership and characterization of the assets, estate inclusion, and applicable tax rules.
Should married couples put brokerage accounts in their living trust?
Whether a particular brokerage account should be titled in a living trust depends on the couple’s estate plan, the type of account, ownership and community-property considerations, and the financial institution’s requirements. This should be reviewed as part of the trust-funding process.
Why is community property important for California estate planning?
Community-property characterization can affect ownership rights, estate administration, and tax basis. For appreciated assets, the potential basis adjustment following the first spouse’s death can make proper characterization especially important.