Does a TOD account always have a stepped up basis for the beneficiaries?

[audreyh1]

Are there any circumstances in which Transfer on Death (TOD) accounts do NOT have a stepped up basis when the beneficiaries inherit from the deceased account owner? The attorney thought I should double check about the stepped up basis with the brokerage company.

I've been researching online, and I don't ever see mention of anything other than stepped up basis at time of death.

Could he have been thinking about inheriting IRAs (which never have TODs)?

[Sunset]

How about if it was a joint account, would be pretty hard/easy to argue that all/none of the funds should be stepped up as whose were they owned by at the time of death ?

[audreyh1]

Right - - joint account is a little different.

My case, however, is not.

[MooreBonds]

Quote:

Originally Posted by audreyh1 Right - - joint account is a little different. My case, however, is not.

2 "possible" qualifiers (sure, they are not common...but could technically fit the unusual circumstances you are looking for)

Savings Bonds - If you are a beneficiary (essentially, a "TOD"), then you still owe income taxes on any previously untaxed earned interest; therefore, the stepped-up basis does not apply, beyond the original cost of the savings bond. (side note: Most people pay taxes on the earned interest when the bond is cashed in, but you do have the option of paying income taxes on the interest earned each year-which could increase your 'cost basis').

Previous estate tax exemption usage - if someone had previously used part of their estate exemption credit, and the net asset value of their entire estate exceeded the remaining value of the estate exemption, then you would owe estate taxes on the value of the transferred assets. You would still receive a "stepped-up cost basis", but it would not be all tax-free, as a stepped-up basis would typically help provide.

[gauss]

Is there a specific case/exception that concerns you?

The general rule is below. Federal Estate tax, in general, determines property that would qualify for the stepped-up basis. Adding TOD to property title does not bypass it from Federal Estate tax.

-gauss


CFR 1-1014-1 "Basis of Property Acquired from a decedent"
has the following general rule which states if the property must be included in the gross estate value when determining if there is any Federal Estate Tax liability.

Quote:

(a) General rule. The purpose of section 1014 is, in general, to provide a basis for property acquired from a decedent which is equal to the value placed upon such property for purposes of the Federal estate tax. Accordingly, the general rule is that the basis of property acquired from a decedent is the fair market value of such property at the date of the decedent’s death, or, if the decedent’s executor so elects, at the alternate valuation date prescribed in section 2032, or in section 811(j) of the Internal Revenue Code of 1939. Property acquired from a decedent includes, principally, property acquired by bequest, devise, or inheritance, and, in the case of decedents dying after December 31, 1953, property required to be included in determining the value of the decedent’s gross estate under any provision of the Internal Revenue Code of 1954 or the Internal Revenue Code of 1939.

[audreyh1]

No, I don't have a specific concern. My Dad's estate attorney raised the concern that I make sure the brokerage account assets would pass with stepped up basis and I can't figure out why they would not.

[gauss]

Quote:

Originally Posted by audreyh1 No, I don't have a specific concern. My Dad's estate attorney raised the concern that I make sure the brokerage account assets would pass with stepped up basis and I can't figure out why they would not.

Do you do your own taxes? Use software? If so you could do a provisional return to see if the tax software asks you critical questions about this.

If you pay someone to do your taxes, then perhaps you could run it by them.

You could also ask the estate attorney about his specific concerns. Brokerage accounts don't unusually offer tax advice so I am not sure where he is headed with this.

-gauss

[CaliKid]

Shouldn't be an issue. If it's POD I think by definition it steps up as it paid on death.

I am not a fan of PODs as I think people should have their assets in a trust so they can pay on the other "D" disability.

[gauss]

Maybe attorney is throwing that out just to plant the seed of enough fear/doubt in you so that you need additional some additional services from him (ie trust vs TOD).

-gauss

[audreyh1]

I think he is just making sure I dot the i's.

He also made me double check the survivorship language on Dad's checking account.

But I can't find any scenario of a single owner non-retirement investment account with TOD where the basis is not stepped up on death. There is nothing in the 7 pages explaining the TOD beneficiary form that indicates anything unusual. Seems routine to me. Upon death brokerage splits the account for the beneficiaries. Account is still considered part of the estate value for estate inheritance tax purposes.

[target2019]

I think the lawyer is asking a simpler question. It's more about whether the brokerage company has procedures that will step up the basis as it should. Or must you be very cautious in checking and verifying this as things proceed. Because of how complicated backend systems are, things might take more human intervention.

[audreyh1]

Quote:

Originally Posted by target2019 I think the lawyer is asking a simpler question. It's more about whether the brokerage company has procedures that will step up the basis as it should. Or must you be very cautious in checking and verifying this as things proceed. Because of how complicated backend systems are, things might take more human intervention.

Could be. But it's not really the brokerage's say - ultimately the client is responsible for determining the basis. Does mean more work for the client to demonstrate the correct basis.

Good question though.

[target2019]

No question in there. Not suggesting it is the brokerage's say. Not saying it isn't clients ultimate responsibility. Post was about the processes at the brokerage. Gday.

[MooreBonds]

Quote:

Originally Posted by audreyh1 Could be. But it's not really the brokerage's say - ultimately the client is responsible for determining the basis. Does mean more work for the client to demonstrate the correct basis.

You are correct, but with a caveat - when you sell the securities, the broker does now submit "cost information" to the IRS, based on the broker's knowledge of what your "cost basis" is. If securities were purchased after (I think) 2012, the brokers are required by law to track your cost, and report it. Many times they are correct, but every once in a while (often with MLPs and other special situations/distributions), their adjusted cost basis is off. If you receive the securities from your father's account, there could be a mistake/misunderstanding as to what the cost basis is when you go to sell it. If you transfer it to another firm, the broker may attempt to transfer the "cost basis" to the new firm based on your father's cost basis.

If the broker submits cost information to the IRS that is radically different from what you report, it could subject you to more scrutiny, and/or an audit. So just be aware of the cost basis information when the securities are ultimately transferred, and what your account shows for the official cost basis. Not a major deal, but a simple step when that occurs could avoid large headaches down the road - especially if you hold your father's securities for a long while and sell them 20 years from now.

[Dancfo]

I'd be concerned that the estate attorney is "asking" you this question if the question is a tax question vs. and brokerage's ability to change basis. He should answer this for you or have resources (CPA) to get the answer. This is not your responsibility. As you mention, you (or agent) are responsible for making the determination in this case, not the custodian. Aside from the few unusual circumstances listed, I do not see why the basis would not be stepped up.

Regarding IRA's and TOD designations, an IRA beneficiary designation would seem to me essentially the same as a TOD - a transfer of ownership by operation of law. Granted, they are not designated the same, but the result is the same. There is no real "step-up" on death in the IRA though, even though the IRA is included in a decedent's estate for tax purposes. This differs from a probate proceeding or trust disposition.

[audreyh1]

I talked to the brokerage and they set up the accounts and the basis of the assets are set to the value at the time of death if the original owner, so there should be no issues. I guess the attorney was just making sure I checked.