As part of our estate planning services, we’re always trying to help our clients transfer as much of their wealth as possible to those who they want to receive it. Occasionally we get questions about whether transfer-on-death stocks or brokerage accounts can accomplish this. These are accounts in which a beneficiary is named to receive the assets contained within them upon the passing of the initial account holder. The account holder can also choose to assign specific percentages of the assets to more than one designated beneficiary. Meanwhile, the transfer on death registration—accomplished by filing proper documents with a brokerage—ensures that none of the beneficiaries have either control over or access to the assets while the account holder is still alive.
One common type of account that falls under the rubric of “transfer-on-death” is retirement accounts: both individual retirement accounts and 401k accounts. A person’s spouse has more options for withdrawing money from such an account than other designated beneficiaries, since most retirement plans contain special provisions for spouses.
Other accounts that may be paid to designated beneficiaries include particular brokerage accounts, stocks, and bonds—as determined under the Uniform Transfer on Death Securities Registration Act.
But though these sorts of accounts do help avoid probate, it’s important to note that they are still generally subject to a number of different classifications of taxes, both during the account holder’s lifetime and following their death.
While the account holder is alive, income tax must be paid on any interest, dividends, or other income their investments yield.
When the account holder passes, estate taxes are applied by the federal government to the value of the property transferred to a beneficiary. These accounts, because they are not trusts, do nothing to either avoid or decrease estate taxes. That said, estate taxes only apply to estates exceeding $11.7 million. Virginia, for its part, does not collect estate tax.
Capital gains taxes may be affected by the nature of the transfer-on-death account, potentially for the better. When an individual makes an investment in stocks, and then sells them prior to death, capital gains are applied to any profits earned based on the date of purchase and sale. But when a transfer-on-death account is created, the tax basis resets to the date of the previous owner’s death (at least for now, as there are potential changes in the wind)—so even if the stocks have gone up in value since the original owner purchased them, if the beneficiary sells them upon receiving them and their value has not fluctuated since the date of death, they will not pay capital gains tax on them.
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Whether this is the answer you’re looking for is up to you. But before deciding, it’s important to know all of the options. If you are interested in your property’s disposition in the future, attend one of Promise Law’s free estate planning workshops. These workshops provide a great foundation of information that everyone needs to be able to make good estate planning decisions. Moreover, if you attend a workshop you also get a complimentary one-on-one consultation with one of our attorneys. Contact us today by using our convenient online form or by calling us at (757) 690-2470. We look forward to helping you!