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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

As required by United States Treasury Regulations and IRS Circular 230, you are advised that this message and any documents attached hereto (unless otherwise expressly stated in such document) are not intended or written to be used, and cannot be used by you or any person, for the purpose of avoiding penalties that may be imposed under federal tax laws.

          

 

Brokerage Accounts

Thousands of new brokerage accounts are opened each year and people routinely title them in joint tenancy (with rights of survivorship). Sometimes, this form of ownership is great—a husband and wife have a feeling of togetherness—what’s yours is mine and what’s mine is yours. Both spouses own equal shares of the joint tenancy property. Upon the death of the first spouse, the joint tenancy property passes “automatically” without a will to the surviving spouse. However, joint tenancy can have its drawbacks, especially when it comes to taxes. Let’s take a look at the basic tax rules for brokerage accounts held in joint tenancy and answer some of the most frequently-asked questions.

Basic Tax Principles—
Joint Tenancy with Spouse

Gift Tax
Can I open a brokerage account in joint tenancy with my spouse without incurring gift tax?

Yes. The transfer of property in joint tenancy to your spouse is generally not a taxable gift. Therefore, you can open a joint tenancy brokerage account with your spouse or transfer your assets in and out of a joint tenancy brokerage account with your spouse without incurring gift tax.

Estate Tax
Are the assets in my joint tenancy brokerage account subject to estate tax when the first spouse dies?

No. Where a husband and wife are the sole joint tenants, only one-half of the value of the assets in the brokerage account will be included in the estate of the first spouse to die. However, because there is an unlimited estate tax marital deduction for property passing to a spouse (in joint tenancy or otherwise), no estate tax will be paid on the assets in the joint brokerage account when the first spouse dies.

Be careful, however, not to over-utilize joint tenancy. Property held in this fashion can sometimes cause the family’s estate tax burden to be substantially greater than it otherwise would be upon the death of the surviving spouse. There are estate tax exemptions that could be lost, if substantially all the family’s assets are held in joint tenancy.

Income Tax
What happens to the assets in my joint tenancy brokerage account for income tax purposes when a spouse dies?

Under current law, the tax basis of property is either increased or decreased to its current fair market value upon the death of its owner. Tax basis is what is used to measure gain or loss on the sale of the property. In the case of a brokerage account held in joint tenancy by spouses, the tax basis for one-half of each asset in the brokerage account generally will receive a tax basis increase (or decrease) upon the death of the first spouse.

Basic Tax Principles—
Joint Tenancy with Non-Spouse

Creating a joint tenancy brokerage account with someone other than your spouse (such as your children) is a lot trickier than placing property in joint tenancy with a spouse. Let’s focus on several key issues.

Gift Tax
What are the gift tax implications of opening a joint tenancy brokerage account with someone other than my spouse?

Creating a joint tenancy with someone other than your spouse can result in a taxable gift, if you cannot remove funds from the account without the consent of the other joint tenant. The amount of the gift depends upon certain state law considerations, but when a child is made a joint tenant, the taxable gift is generally no less than one-half of the value of the property in the account. The $12,000 annual per person gift tax exclusion may not apply to this gift; however, everyone also has a lifetime gift tax exemption that may be used against this gift. This exemption is currently $1,000,000. It is rare, however, that someone putting property in joint tenancy with a person other than a spouse wants to use up any portion of this exemption. Caution is strongly advised before opening a joint tenancy brokerage account with someone other than your spouse.

Estate Tax
Will the assets in my brokerage account still be included in my estate if my child is added to my account?

If your child does not contribute any of his or her personal funds to the account, the entire value of the account will generally be included in your estate for estate tax purposes. This will occur regardless of whether placing your child’s name on your joint tenancy brokerage account resulted in a taxable gift. Although appropriate credit will be given for any gift tax paid or gift tax exemptions that were utilized when the joint tenancy was created, all the appreciation in the account will still be included in your estate.

Income Tax
How is the income tax basis of the assets in the account affected when the parent dies?

If the entire value of the brokerage account held in joint tenancy between the parent and child is included in the parent’s estate, there will be a complete basis increase (or decrease) upon the parent’s death (unless the parent’s death occurs at a time when the federal estate tax has been repealed, in which case the basis increase may be limited).

There are numerous tax and family issues involving property held in joint tenancy. If you would like to explore these issues in greater detail, just call Levun, Goodman & Cohen, LLP or see your professional advisor.

 

As required by United States Treasury Regulations and IRS Circular 230, you are advised that this message and any documents attached hereto (unless otherwise expressly stated in such document) are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws.

The materials contained herein have been prepared to provide information relating to the covered subject matter. The authors are not rendering legal, accounting, tax  or other professional advice. If such advice is required, a professional advisor should be engaged.

© 2008 Levun, Goodman & Cohen

 


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