Estate Issues: Transferring Co-owned Assets

How estates transfer assets like brokerage accounts or houses that are co-owned

Q: I just read your article in the newspaper about the parents weighing the pros and cons of sharing assets with their daughter. What do you think about brokerage accounts that are held in joint tenancy with one parent? When the parent passes, how is this account distributed? Is it taxable to the daughter? And, what about a home that is co-owned by one parent and a daughter?

Q: My name was added to my mom’s house a year ago in case of her death. Now she is selling it. I will not receive any of the money from the sale. Will I get an IRS 1099 form for the sale? The title company is saying that as long as they file everything under my mother’s social security number, I won’t be responsible for any taxes.

A: Both of our correspondents demonstrate why you need to be careful when deciding how to hold title to your real estate and non-real estate assets. That’s especially true if you’re thinking of adding a child to the asset’s title.

Protect Assets With Estate Planning, Including Will

In the first question, when you own a brokerage account as joint tenants with rights of survivorship between a parent and child, when the parent dies, the child becomes the sole owner on the account.

The same is true with real estate. Even if you have a will, the way you hold title to the property will prevail over the instructions left in your will. So, if you own property with one of your children, after you pass away that child will inherit the entire property. This is true even if you intend to split your assets evenly and state that in your will.

Moral of the story: Don’t hold assets as joint tenants with rights of survivorship if you want them divided differently in your estate.

Transferring Assets to Children

From a tax perspective, ownership can also get complicated. As a general rule, if you co-own something with your child, you and your child each own 50 percent of the asset as of the day you purchased the asset or changed the title of the asset to put your child on title. If you say that you and your child are equal owners of a brokerage account or home that was worth $100,000 when the asset was put in both names, you each own $50,000 worth of the asset.

Let’s say that years later, the asset is sold for $200,000. Each owner would realize a profit of $50,000 from the sale. Talk to your tax advisor for details, particularly if both social security numbers are on the brokerage account. Or, if both the owners deducted real estate taxes and interest on the mortgage on their tax returns.

In the second question, the parent and child owned the home as joint tenants. Presumably, the mom paid all the expenses and took all tax advantages when it came to the home. The daughter was only on title for estate planning purposes. We assume she didn’t get any tax benefits from the ownership. When the mom sells her home, the mom would give only her social security number to the closing attorney or settlement agent.

Investing: What If Your Brokerage Fails?

That settlement agent or closing attorney would then report the sale to the Internal Revenue Service. The agent would issue a 1099-S to the mother showing that the gross sales price for the home was reported on her social security number.

However, there is one additional catch. It’s possible that the sale of the home may be exempt altogether from federal income taxes:

If the gross proceeds from the sale of the home were $250,000 or under.
When the sales price of a home is $250,000 and under (or $500,000 and under for married couples) and the home was used as the owner’s primary residence for two out of the last five years

Estate Plan Mistake

For all of these situations, there are additional circumstances that could trip up the daughter or the mom when it comes to selling the home. Those could pop up during their lifetimes or after one of them dies. We usually suggest that parents use other means to transfer ownership of their homes after they die. They can use a transfer on death instrument that conveys the home to a child after the parent’s death. Or, they might use a living trust instrument that would keep the home in the trust for the benefit of the child when the parent dies.

At the very least, the parent should have a will in place to designate the child as the recipient of the home after the parent’s death. For more information, consult with an estate attorney.