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Future Tax Reduction on Capital Gains for Joint Investment Account

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  • Future Tax Reduction on Capital Gains for Joint Investment Account

    I have an interesting and fortunate dilemma.

    About 5 years ago, my father passed away and left my mother and I a joint investment account that was worth approximately $1.2m in individual stocks. It has now grown to approximately $2m and is generating on an annual basis about $40k in qualified dividends and am watching it slowly increase the amount of taxes I have to pay including the extra 3.8% net investment income tax given that my wife and I both earn >$250k combined.

    Now my question is, what would be the best route of minimizing the taxable amount of capital gains if my mother or I were to ever liquidate our shares of stock? When my father passed away, I saw the wonderful effects of cost basis adjustments firsthand and was wondering if it was possible to transfer the assets in its entirety to my mother’s individual account given that it currently resides in a joint account (or at least half the account with stocks that have the most capital gains and keep the stocks with all the losses to capitalize on tax loss harvesting in the future or annual $3k deduction if I ever were to sell the shares). My mother is currently retired and has two rental properties that she has positive income on and is living on her pension so she is in a reasonably lower tax bracket than me. My reasoning of doing this would not only be to shift some of the tax burden to her if she ever were to sell shares for her own retirement (I’m the primary account holder on our joint account so I am hit with the capital gains tax for shares) but also if she were to pass away, I would be the beneficiary of her individual account so the cost basis would again be adjusted if she were to pass away. Would this dip into the lifetime gift exclusion if I transferred stock/shares to her individual account and in your opinion, would this be a prudent route to pursue?

    Would appreciate any comments or suggestions on this particular situation. Many thanks!

  • #2
    - sell any at loss.
    - gift to charity.
    - gifting to mother could be done in 15K increments.
    - larger will trigger lifetime gift limit.

    but realize a 2% dividend yield that is fully qualified would be the same if you were invested in total US so i dont really see a problem.

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    • #3
      Are you saying that you pay the tax on 100% of capital gains? If so, you shouldn't be. If you are charitably-inclined, give some appreciated stock to a DAF. If you gift your share to your mom, you'll need to file a gift tax return for the value > $30k (assuming your spouse joins in) and it will reduce your lifetime exclusion. Not a good idea for a doctor.

      You're right, it's a good problem to have, just like being a doctor and making a high salary - the alternative, paying no taxes because you don't make money, is not where you want to be. If your mom will eventually gift you the stock, wait for the 50% step up. But you need to be working with your CPA/financial planner in the meantime to finesse how you handle this. Not a black and white "problem".
      Financial planning, investment management and CPA services for medical professionals | 270-247-6087

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      • #4
        Thanks for the comments and suggestions. If it’s a joint account, does it trigger the gift tax exclusion? To me I figure we own it 50/50, is that not the right assumption I should have? What’re the downsides of reducing my gift tax exclusion with my mother? I don’t anticipate having more than $11.4m being transferred between my mother and I.

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        • #5
          your father left $1.2M worth of stocks to your mother and you in a joint manner, that's quite an unusual way to pass on an account, isn't it?

          Could you share how this came about? Was your mother and or someone else like an attorney involved in that setup and if so what was the reasoning?

          I guess I didn't even know you could have a joint investment account with someone other than a spouse. I would have thought that if the assets were passed on with simply beneficiaries on the account listed as 50% spouse and 50% child, if that's allowed, would have resulted in spouse and child then each separately owning 50% of the assets, not owning 100% in a joint manner.

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          • #6
            Originally posted by jacoavlu View Post
            your father left $1.2M worth of stocks to your mother and you in a joint manner, that's quite an unusual way to pass on an account, isn't it?

            Could you share how this came about? Was your mother and or someone else like an attorney involved in that setup and if so what was the reasoning?

            I guess I didn't even know you could have a joint investment account with someone other than a spouse. I would have thought that if the assets were passed on with simply beneficiaries on the account listed as 50% spouse and 50% child, if that's allowed, would have resulted in spouse and child then each separately owning 50% of the assets, not owning 100% in a joint manner.
            Agreed. How old is your mother? Is long-term care planning going to play into this decision? Tread carefully

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            • #7
              Originally posted by jacoavlu View Post
              your father left $1.2M worth of stocks to your mother and you in a joint manner, that's quite an unusual way to pass on an account, isn't it?

              Could you share how this came about? Was your mother and or someone else like an attorney involved in that setup and if so what was the reasoning?

              I guess I didn't even know you could have a joint investment account with someone other than a spouse. I would have thought that if the assets were passed on with simply beneficiaries on the account listed as 50% spouse and 50% child, if that's allowed, would have resulted in spouse and child then each separately owning 50% of the assets, not owning 100% in a joint manner.
              So my father passed onto me an investment account with me as the direct beneficiary that had about $500k in it. Through our probate proceedings we realized my father had a number of shares through computershare brokerage back in the day so we consolidated all the shares into this investment account and I added my mother as a joint account owner (and I'm currently the primary owner). The reason this idea came to fruition was that if she ever needed money for retirement, she would liquidate shares and use the cash PRN but unfortunately the one time this happened, she sold a large chunk of APPL stock and I got smacked with a capital gains tax on 15% which still amounted to a good amount of tax that was paid that year. I just want to see if there's a way around this situation for the future so she can sell shares as she needs without me having to pay the tax on her proceedings (since I'm the primary account holder of our joint account).

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              • #8
                Originally posted by childay View Post

                Agreed. How old is your mother? Is long-term care planning going to play into this decision? Tread carefully
                My mother is 70 years old right now, she just started taking social security payments (extended it to the max). Eventually we'd like to use assets within this joint account to pay for her future long term care or retirement home.

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                • #9
                  Would this be a situation to use the funds for long term care insurance (not expecting the OP to know, more to get some opinions from the experts)?

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                  • #10
                    Originally posted by AspiringFI View Post

                    My mother is 70 years old right now, she just started taking social security payments (extended it to the max). Eventually we'd like to use assets within this joint account to pay for her future long term care or retirement home.
                    This changes things. You could potentially be opening the whole account up to Medicaid liability in the future with joint ownership or, at a minimum, opening yourself up to inquiry by Medicaid. Might want to meet with an attorney who specializes in Medicaid law just to make sure you are protected.
                    Financial planning, investment management and CPA services for medical professionals | 270-247-6087

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                    • #11
                      Originally posted by jfoxcpacfp View Post

                      This changes things. You could potentially be opening the whole account up to Medicaid liability in the future with joint ownership or, at a minimum, opening yourself up to inquiry by Medicaid. Might want to meet with an attorney who specializes in Medicaid law just to make sure you are protected.
                      Sorry just to clarify, my mother is taking social security benefits for retirement, how does Medicaid liability plays into this?

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                      • #12
                        Originally posted by AspiringFI View Post

                        Sorry just to clarify, my mother is taking social security benefits for retirement, how does Medicaid liability plays into this?
                        I’m referring to assets subject to seizure by the government for her care (i.e. payments that Medicaid would be otherwise be responsible for). Totally appropriate for her half to go toward her care, but you may have a differing opinion about the potential for the government to seize (or attempt to seize) your half of the account.
                        Financial planning, investment management and CPA services for medical professionals | 270-247-6087

                        Comment


                        • #13
                          “so we consolidated all the shares into this investment account and I added my mother as a joint account owner (and I'm currently the primary owner).

                          This is the problem. You could have declined, setup an account in her name with you as the primary beneficiary. Ownership and taxes follow the legal names. That is the Medicaid/gift tax/income tax reporting issue that now exists.

                          Access, trading, and bank accounts are different forms.

                          The question becomes how to undo the joint ownership or have mom reimburse you for the taxes you mentioned. That still leaves the joint ownership issue (although it solves the tax).

                          Joint means each has the right to 100%. Not where you want to be (50/50) with 100% tax liability as primary. Solve that problem. It will only get worse as time goes on. It sounds like you aren’t even wanting your 50% if mom needs it. I would hit up the attorney that handled the estate for at least a consultation. Best case, some type of amendment filed that the IRS/Brokerages will accept as correction of ownership. No idea if that is possible. Worth asking.

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                          • #14
                            Thanks this is helpful. Found a CPA and going to consult with them and see if theres a way to either file some sort of amendment or somehow separate the money in the account from my mother and i.

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