San Antonio Express-News
July 8, 2003

Taxes on a Survivorship Account

copyright 2003, Paul Premack

While federal law is the source of any taxes that may be imposed, it is state law that determines the underlying property rights. Thus, the first question to ask yourself is "Who did the money belong to before it was put into this joint account?"

Any bank deposit in Texas belongs to the person who owned the funds prior to placing them into the account. Tracking a commingled account can be a daunting task, but in most real cases there is a primary accountholder who puts in all the funds. If the funds belonged to you (the daughter), there is no change in ownership and there are no tax consequences when your mother dies.

If the funds all belonged to your mother and she dies, then (because of the legally stated right of survivorship agreement with the bank) you become the owner. Thus federal estate tax and income tax must be considered.

On the income tax side, you do not report your new property as income on your 1040. It is an inheritance, not taxable income. The only concern you have is income tax on the earnings after you have become owner. Also, if the asset you inherit is not a simple bank account with money – but is perhaps a brokerage account with stocks – then you get a free step up in basis. Congress has passed a law that caps the step up in basis, but that tax increase does not kick-in until 2007. (For more details on this negative aspect of the 2001 Tax Act, visit my column archives at www.Premack.com and read the column from April 13, 2001).

For example, if the account contains a stock that your mother paid $10 for, but it was worth $15 on the day she died, then your new tax basis is $15. If you sell the stock right away, you may not have to pay capital gain tax. If you wait a year and the stock goes up to $20 before you sell, then you owe tax on the new $5 of profit (but not the $10 of profit your mother would have had to report if she had lived and made the same sale).

On the estate tax side, the value of the account is part of the taxable estate of the person who died. Federal estate tax is imposed upon the full amount – but only if the entire estate exceeds $1 million in value (or $1.5 million in 2004). Hence, if your mother’s other assets are substantial – let’s say she has a house worth $300,000, investments worth $700,000, and this bank account is worth $100,000 – then if she dies in 2003 her estate will owe taxes. Conversely, if her assets are more modest – say a $100,000 house, $200,000 in stocks and this bank account is $50,000 – then there are no estate taxes.