Money Matters

Advice on joint tenancy with rights of survivorship

June 8, 2013 

Q. We had dinner with some friends last night, and they were sharing some of the estate planning they are doing based on the advice of their attorney. One thing that seemed like it might apply to us concerns a non-retirement brokerage account. They had kept their accounts separate for years because it is a third marriage for him and a fourth for her, but they had finally decided to combine the accounts into a joint with rights of survivorship, which is the type of account my wife of 35 years and I have established. Their attorney told them not to combine the accounts but to make sure they had a transfer on death form in place naming the other spouse as primary beneficiary. This way, upon the death of the first spouse, the surviving spouse would receive a stepped-up basis on the entire account versus just one-half on a joint account. So, we are thinking we should divide our rather large joint account into two separate individual accounts.

Does this make sense? We have also each established joint accounts with survivorship rights with our three children so they would inherit these stocks and bonds by-passing probate. Should we change these six accounts back to our names individually and name the children as beneficiaries using this transfer on death form they mentioned? Can anyone use this form, and if so do we need to hire a lawyer to draft one for us? We’ve never heard of this type of form and neither had they.

A. First of all, basing your estate planning on another couple’s instructions from their lawyer is not a good idea. I’ll provide some general advice on joint tenancy with rights of survivorship (JTWROS), transfer on death forms (TOD), and the stepped-up basis rules, but you should meet with an estate planning attorney for your own plan.

Your friends could have completely different circumstances, portfolio holdings, final wishes and desires than you and your wife, and totally different actions may be more appropriate for your own estate planning.

In a common law state, such as North Carolina, accounts held JTWROS in most cases will receive a stepped-up basis on 50 percent of the account upon the death of one holder. In a community property state, the survivor will receive a 100-percent stepped-up basis on the holdings. A stepped-up basis means that the value of the holdings on the date of death (or an alternative date six months after death if certain conditions are met) become the basis for the survivor of JTWROS accounts or the new owner of an inherited account.

Example: Joe and Betty are married in North Carolina with a brokerage account held JTWROS. The cost basis of the account is $100,000, and the value is $200,000. If they were to sell the entire portfolio, they would owe capital gains tax on $100,000. Joes dies and the account value on the date of his death is still $200,000. Betty’s new cost basis is $150,000 since she receives a stepped-up basis on 50 percent of the account. Now if Betty sells the entire portfolio for $200,000 she will owe capital gains tax on $50,000.

A TOD form for brokerage accounts is now accepted in most states, including North Carolina (contact your brokerage house if you are unsure of for state). The form can be obtained from your brokerage house and it acts much like a beneficiary designation for retirement accounts or a payable on death designation for accounts held at financial institutions. The accounts will by-pass probate, and the new owner will receive a stepped-up basis on 100 percent of the account. In the above example, if Joe owned the account individually with Betty named as beneficiary on a TOD form, Betty’s new cost basis would be $200,000. If she sold the entire portfolio for $200,000, she would owe no capital gains tax.

Splitting an account held JTWROS into two individual accounts doesn’t really gain anything unless you think you know which spouse will predecease the other. If you guess correctly and moved all of the highly appreciated assets into an individually account owned by the unlucky spouse with a TOD, then the surviving spouse would get a 100-percent stepped-up basis on that account. If you divide the assets evenly, you haven’t gained anything from a tax standpoint. Using the above example, Betty and Joe split the JTWROS account into two accounts, sharing the cost basis evenly. Now, they each have an account valued at $100,000 with a cost basis of $50,000 and name each other as beneficiary on a TOD form. Joe dies and Betty inherits the account and receives a 100-percent stepped-up basis. She now owns an account valued at $200,000 with a basis of $150,000 and if sold will owe capital gains on $50,000. If one spouse is terminal and you are thinking about cleverly moving assets from a JTWROS account to an individual account, know that there is a one-year look-back period with respect to the basis adjustment.

When you are moving money to and from a non-spouse you run into the gift tax rules. Any amounts over $14,000 gifted to a non-spouse individual in 2013 will require that you file a gift tax return. When you established your joint accounts with your children you gave away a portion of your assets. If the amount was more than the exempt amount in that year, you should have filed a gift tax return. If you now change the title on the accounts to you as an individual, the former co-owner will now have made a gift to you and if over the current exempt amount will need to file a gift tax return.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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