You may have heard that it is wise to always title assets in the name of two people, or “owners.” In the event of the death of one owner, the asset passes directly to the surviving owner and avoids probate court. However, did you know that in some cases, including an additional owner on an asset can result in an unnecessary capital gains tax?
For example, if a child is named a co-owner on a stock portfolio while a parent is living, upon the death of that parent, the child’s “tax basis” in the stock is based on the amount that the parent originally paid for the stock. In other words, when the child sells the stock, he or she will pay tax on the gain from the date the parent bought the stock until the date of sale. All of the appreciation during the parent’s lifetime will be taxed, potentially resulting in thousands, if not tens of thousands of dollars in unnecessary capital gains tax.
On the other hand, if a child inherits a stock portfolio upon a parent’s death, the child’s “tax basis” on the stock begins the day that the parent died. Therefore, when the child sells the stock, he or she will only be taxed on the gain from the date of the parent’s death until the date of sale. Any appreciation that occurred during the parent’s lifetime completely escapes tax.