Thousands of new brokerage accounts are opened each year and people routinely title them in joint tenancy (with rights of survivorship). This form of ownership can be great for a close-knit married couple -- 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 some of the most frequently asked questions.
Joint Tenancy with Spouse: Brokerage Account Tax Implications
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.
Are the assets in my joint tenancy brokerage account subject to estate tax when the first spouse dies?
No. Where partners 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 as this 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. Estate tax exemptions could be lost if substantially all of a family's assets are held in joint tenancy.
What happens to the assets in my joint tenancy brokerage account for income tax purposes when a spouse dies?
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.
Joint Tenancy with Non-Spouse/Child: Brokerage Account Tax Implications
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 state law, but when a child is the joint tenant, the taxable gift is generally no less than one-half of the value of the property in the account. The annual gift tax exclusion ($14,000 in 2017) may not apply to this gift. However, the lifetime estate and gift tax exemption ($5.49 million in 2017) may apply. It is rare, however, that someone would want to use any of this lifetime exemption in a transaction involving a joint tenancy with a person other than a spouse. Tread carefully when opening a joint tenancy brokerage account with someone other than your spouse.
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.
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.
Learn More About Your Tax Obligations From an Experienced Lawyer
There are a wide range of tax planning options, but often very little room for error. As noted, there are several factors to consider just when setting up a joint tenancy. Getting it right the first time will save you money and pain in the long run. You can learn more about the current laws and your options by speaking with an experienced tax attorney.