Suppose your mother, age 85, has $100,000 worth of securities that cost her $20,000. If she dies and leaves her portfolio to you, you’ll inherit with a “step-up in basis,” under current law. You can sell the inherited securities and owe no capital gains tax on all the appreciation during your mother’s lifetime.
But what if your mother names you as joint owner during her lifetime? Will you get a basis step-up on your mother’s $50,000 but no step-up on your $50,000 share? Fortunately, the full tax break need not be lost. If two co-owners are not married to each other, the estate of the first owner to die will include a share of the property based on the portion of the original purchase price furnished by the decedent.
Thus, if your mother owns securities outright and adds you as a joint owner, 100 percent of the securities will be included in her estate. You’ll get a full step-up in basis after you inherit. On the downside, if your mother names you as joint owner, no one else can inherit those assets, even your other siblings. If your sister who lives around the corner from your mother is the one whose name goes on the brokerage account, then all of the securities will go to your sister and none to you. In these circumstances, a trust may work best to protect all parties. One of the siblings could be a co-trustee, empowered to act if your mother became incapacitated.