Quick Answer
TOD registration and JTWROS both avoid probate, but TOD assets stay in the gross estate and JTWROS steps up only the decedent's share. Tenants in common assets pass through the decedent's estate instead of automatically to a co-owner. UGMA/UTMA gifts are irrevocable; if the donor-custodian dies first, the account is pulled back into the donor's gross estate.
Now that you understand how inherited and gifted securities are taxed, let's look at the account structures that determine how assets pass to beneficiaries and whether they go through probate.
How Does Transfer on Death (TOD) Registration Work?
TOD designation (also called a beneficiary designation) is the simplest way to pass a securities account outside of probate:
- Upon the account holder's death, assets transfer directly to the named beneficiary without going through probate
- The beneficiary receives the stepped-up basis (same as any inherited securities)
- TOD registration does not change the tax treatment during the account holder's lifetime
- The account holder retains full control and can change beneficiaries at any time
- The assets are still included in the decedent's gross estate for estate tax purposes
Exam Tip: Gotchas
- TOD accounts avoid probate but are still in the gross estate. Students often assume "avoids probate" means "avoids estate tax." It does not. The assets are counted for estate tax purposes even though they skip the probate process.
How Do the Joint Account Types Differ?
How a joint account is registered determines what happens when one owner dies:
| Feature | JTWROS | Tenants in Common (TIC) |
|---|---|---|
| What happens at death | Entire account passes to surviving owner(s) | Decedent's share passes through their estate |
| Probate | Avoided | Decedent's share goes through probate |
| Basis step-up | Only the decedent's share gets a step-up | Only the decedent's share gets a step-up |
| Ownership shares | Equal and undivided | Can be unequal (e.g., 60/40) |
| Transfer of share | Cannot transfer without other owner's consent | Each owner can transfer their share independently |
Joint Tenants with Right of Survivorship (JTWROS):
- Upon one owner's death, the entire account passes to the surviving owner(s) automatically
- Avoids probate
- The decedent's share receives a stepped-up basis; the surviving owner's share retains the original basis
- Exception: In community property states, both shares may receive a step-up
Tenants in Common (TIC):
- Each owner holds a distinct, transferable share
- Upon death, the decedent's share passes through their estate (via will or intestacy), NOT automatically to the other owner
- The decedent's share receives a stepped-up basis
Think of it this way: JTWROS is like a joint bank account: when one person dies, the survivor owns everything automatically. TIC is like co-owning a rental property with a friend: your share belongs to your estate, and your heirs decide what happens to it.
Memory Aid:
- JTWROS = "Right Of Survivorship" (survivor gets all, avoids probate)
- TIC = "In Common" (your share goes to your estate, requires probate)
Exam Tip: Gotchas
- JTWROS passes automatically to the survivor; TIC goes through the estate. This is the most commonly tested distinction between joint account types.
- Only the decedent's share gets a stepped-up basis in both JTWROS and TIC. The surviving owner's original shares keep their original cost basis.
How Do UGMA/UTMA Custodial Accounts Work?
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow adults to make gifts to minors:
- Assets held in UGMA/UTMA accounts are irrevocable gifts to the minor
- The transfer is a completed gift for gift tax purposes (annual exclusion applies)
- The minor is the beneficial owner and is taxed on income generated by the account
- The custodian manages the account until the minor reaches the age of majority, at which point the assets transfer unconditionally
Key features:
| Feature | UGMA | UTMA |
|---|---|---|
| Asset types | Cash, securities | Cash, securities, real estate, patents, other property |
| Age of majority | 18 | 18 or 21, depending on the state. The uniform act's own default for an ordinary custodial gift is 21; the 18-or-state-majority age belongs to a custodianship created without the donor's express authority, and each enacting state then sets its own age |
| Assets at majority | Transfer to the minor unconditionally | Transfer to the minor unconditionally |
Kiddie tax rules:
- The kiddie tax taxes a child's unearned income above an annual threshold at the parent's marginal rate rather than the child's. It applies to a child under 19, or under 24 if a full-time student.
Exam Tip: Gotchas
- UGMA/UTMA gifts are irrevocable. The donor cannot take the assets back. The minor receives the assets unconditionally at the age of majority, regardless of how mature or responsible they are.
- If the donor is the custodian and dies, the account is in the donor's gross estate. This catches students who assume custodial accounts are always outside the estate.
- A minor's unearned income above an annual threshold is taxed at the parent's marginal rate (the kiddie tax). This stops families from shifting investment income into a child's lower bracket.
What Should You Check on Exam Day?
- TOD and JTWROS both avoid probate; only TIC assets pass through the estate. All three still count toward the gross estate for tax purposes.
- Only the decedent's share of a JTWROS or TIC account gets a stepped-up basis (both halves step up in community property states).
- UGMA/UTMA gifts are irrevocable and complete for gift tax purposes; a donor-custodian's death before majority pulls the account into the donor's gross estate.
- The kiddie tax taxes a minor's unearned income above an annual threshold at the parent's marginal rate.