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Brokerage accounts: Tax law on joint owner v. beneficiary

Your July 24 column was about whether a mother should make a daughter the joint owner or the beneficiary of her brokerage account. Am I right that as a beneficiary, the daughter will inherit the stocks at their full stepped-up value, but that as a joint owner, she’d only get a half step-up?

Nope. The daughter can inherit the stocks at their full market value even if she’s listed as joint owner.

When you sell stocks, your taxable profit is the difference between sale price and original cost. If you received them as a gift, your original cost is whatever the donor paid for them. If you inherited them, your original cost is their market value when the original owner died. You have no taxable profit if you sell them for that “stepped-up” value.

But there’s fine print. From the IRS viewpoint, Mom hasn’t made a completed gift by listing her daughter as the joint owner of stocks that are held “in street name” — i.e., in the name of a brokerage house, which is now standard. For tax purposes, the gift isn’t completed until the daughter withdraws from the brokerage account, says Alan E. Weiner, a Melville tax accountant. The upshot: If she sells stocks during Mom’s lifetime, she must use Mom’s original cost to determine taxes on the sale; but she gets a full step-up on any stocks she sells after her mother’s death.

Why a full step-up, not a half step-up? When an account is jointly owned by people who aren’t married to each other, Weiner says, the IRS assumes the entire account was owned by the first to die, unless the survivor refutes that assumption. Not so for married joint owners. I’ll explain how that works next week.

THE BOTTOM LINE Tax law doesn’t treat “incompleted” gifts as gifts.


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