Taxable Investment Account Jointly Owner

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    I would like to clarify valuation of a joint taxable investment account when a first to die joint owner passes.

    Elderly couple holds approximately 5% of total investments in a single Vanguard taxable investment account registered in both their names (e.g., John Doe, Mary Doe). There is no beneficiary designation because the surviving spouse becomes sole owner upon the death of the other owner. At that time I believe the surviving owner should name a beneficiary. All other retirement investments are in individual tax deferred IRA accounts.

    My question is “how is the account valued at the time of the passing of the first joint owner?” Does the surviving spouse receive a stepped up basis on one-half the value of the account at the time of death? Should the surviving spouse immediately name a beneficiary on that account (e.g., surviving child) and how is that account valued at the later time of death of the surviving spouse? I believe the answer to this last question is the surviving child receives the stepped up basis at the time of death of the parent.

    Any valid information you can provide would be appreciated.
    Tom D.

    Alan S.

    Hi, Tom. You are correct. But the last paragraph below poses an interesting question.

    If the surviving spouse inherits a “qualified joint interest”, their basis is the original cost basis of half the property and the DOD cost basis of the other half (the half they inherited). It does not matter which spouse made the purchases. If the account was community property in a community property state, the entire value receives the basis adjustment.

    In many brokerages, the couple could name a TOD beneficiary while both living, that would allow transfer to that beneficiary upon the second death or common disaster. However, VG inexplicably will NOT accept such a TOD on a joint account. Therefore, the surviving spouse should quickly name their own beneficiary on the account at the same time the account is retitled in that spouse’s name.

    One issue that all the IRS Pubs gloss over is holding period. Of course, inherited assets always have a LT holding period, but what the Pubs do not confirm is the holding period for the survivor’s interest in qualified joint property that was purchased just before the death of the first spouse. The surviving spouse’s share that was owned all along does not get a basis adjustment, but does it get a holding period adjustment to LT or does it actually have to be held 1 year before it gets LT treatment? Most likely tax preparers routinely report all such sales by the surviving spouse as LT, but I do not know if that is technically correct for this example?

    Anyone have cite on this?


    Thanks for your reply Alan. What started me thinking about the current joint ownership was, given our ages (82 me and 84 her), if we continue to make contributions to a taxable account should I consider setting up and funding an separate account in just my name at Vanguard with her as primary beneficiary with the thinking I will be the first to pass.

    Fortunately our income somewhat exceeds our needs and funds are available for investment in a taxable account. We have increased our qualified charitable distribution (QCD) each year and will continue to do so thus taking advantage of a reduced AGI and taxable income. Our cash account is somewhat higher than normal, thus the consideration of a taxable account investment. Lastly, we are not in a common law state and Tennessee is coming to an end of its tax on dividends and capital gain distributions in two years. No income tax per se. Regards,
    Tom D

    Alan S.

    You might consider that if the current gains are significant enough. As JTs, there is a step up on 50% of the assets. Should you pass first (and the gifting of her share to you was completed more than 1 year before your death, there would be a full step up at your death. On the other hand, should she pre decease you, this backfires and there is no basis adjustment at all upon her death.

    These rules apply per asset, not per account. Therefore, if you proceeded you would leave any assets with little gain or with losses in the joint account. If the basis adjustment is a “step down”, better 50% than 100%.

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