Q. If a person owns a brokerage account, a bank account, a home or really any asset jointly with a right of survivorship with an elderly parent, does the person, when he inherits that asset, still receive the stepped-up basis? So many adult children own assets jointly with their elderly parents solely to spare their parents the burden of day-to-day management of those assets, but I’m wondering what it means.
— Helping mom and dad
A. Lots of professionals believe it’s a bad idea to put an adult child as a joint account holder if the reason is only to help mom and dad.
Before we explain why, let’s cover how the step-up rules work.
Basis is the attributed cost of an asset — generally the purchase price.
Upon sale of the asset, a gain or loss may be recognized for tax purposes by subtracting your basis from the sales price, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.
“If you receive a gift of property, you receive `carry-over basis,’ which is the basis from the prior owner,” he said.
Note the basis can’t be higher than the current market value – you can’t gift a loss.
If you inherit solely-owned assets when someone dies, you receive “stepped-up basis,” which is generally the date-of-death market value, Novick said, noting the basis can also be stepped-down depending on the date-of-death valuation.
As a result, highly appreciated inherited assets can be sold with limited capital gains tax consequences, he said.
For assets owned jointly, the step-up in basis only applies to the deceased owner’s share of the property.
Generally, each owner’s share is based on the owner’s contribution to the asset, Novick said.
“The presumption for joint assets is that ownership is split equally unless there is evidence to the contrary,” he said. “It doesn’t matter if assets are owned `joint with rights of survivorship’ or `joint tenants in common.'”
However, he said, assets owned jointly by spouses are treated a bit differently – each spouse is deemed to be a 50 percent owner regardless of the source of funds, so only 50 percent of such assets will be stepped-up upon the first spouse’s death.
When a person is added to the deed of a home, Novick said, it is a completed gift with carry-over basis in proportion to the new owner’s share.
If a single parent adds a child to the deed of a home without any indication of percentage ownership, they both own 50 percent and only the parent’s share of the home receives stepped-up basis at the parent’s death, Novick said.
Adding a child as joint owner to a family business would be treated similarly, he said.
“The partial loss of step-up in basis could be significant and needs to be contemplated before making such lifetime gifts,” he said. “If preserving the majority of the step-up in basis is more important than being equal owners, you can specify the gift percentage in the transfer documents.”
For instance, a 1 percent gift would result in 99 percent still receiving a step-up in basis upon the other owner’s death.
Then there are financial accounts, which are treated differently.
Novick said adding a person as a joint owner of a financial account is not a completed gift until the new joint owner withdraws funds from the account for himself.
Additionally, when a parent adds a child to a financial account, it is fairly typical — and easy to prove — that the parent contributed 100 percent to the asset while the child contributed nothing. Such accounts are still eligible for full step-up in basis upon the parent’s death, he said.
Many industry professionals do not advise adding a child as joint owner to a parent’s financial assets or real estate if the reason is to assist the parent manage his affairs.
“Among several pitfalls with this approach are issues concerning taxes — current income tax issues due to the asset, step-up in basis at death, as well as lifetime gift and death taxes — exposing the parent’s assets to the child’s creditors, allowing the child unlimited access to the parent’s assets and potentially altering a parent’s overall inheritance plan,” Novick said.
Instead, he said, it’s often preferable to leave assets owned solely by the parent and allow the child to help manage the parent’s affairs via a durable power of attorney, he said.
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