Account Titling Mistakes to Avoid Only a Half Step-Up in Cost Basis

Account Titling Mistakes to Avoid - Estate Planning and Living Trust document image
A client may want to add a loved one such as a spouse or a child to their bank or brokerage account as a safeguard in the event of incapacity. That person can help manage the finances if the client is no longer able to do so independently. Adding a spouse or child to an account will allow that designated individual to write checks, pay the utilities, and help manage funds. Another reason to consider adding a loved one to an account is for post-death estate planning. An alternative estate planning strategy is to add a joint owner to the account, with rights of survivorship. This is a common mistake. It is important to focus on the client's planning goals to avoid unintended consequences.
When you add an individual to an account, you are giving that person a present interest in that account. We have all heard the response in this situation, “It’s okay, I trust my child.” One must consider outside circumstances that are out of their control. For example, what if your child is sued, goes bankrupt, or goes through a divorce? In that case, your account would be up for grabs. Having a simple Financial Power of Attorney may accomplish the exact same objective, but with no risk. Many individuals also take this route as a way to avoid probate in order to transfer assets after death. Nevertheless, the person you are adding to the account may not be in line with the rest of your estate planning goals. There are better ways to transfer assets, in a more secure and efficient way, such as beneficiary designation or through Trust planning.
One big element that most individuals do not think about when making this type of change is taxes. Many people are aware that when the owner of a taxable account passes, the inherited party gets a ‘stepped-up’ cost basis. However, what happens to assets when they are owned jointly? Assets that are owned jointly only receive a half step-up in cost basis. This might not be a huge problem for some, or if we are just dealing with a husband and wife, but consider if you are a joint owner with your child and there is a large age difference. Even if each party had a different contribution amount, they would each still share a 50% ownership interest in the account and are only allowed half the step-up in cost basis upon one’s passing.
Families and individuals should consult and work with estate planning, finance and tax professionals so that every decision is made with their and their families' best interests in mind and so that mistakes are avoided. If you are interested in putting the right team behind you or your clients, Maddin Hauser’s estate planning attorneys are here to help.