Transfer on Death and Estate Planning Vehicles

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.

Transfer on Death (TOD) Registration

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.

Joint Account Types

How a joint account is registered determines what happens when one owner dies:

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.

UGMA/UTMA Custodial Accounts

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

Key features:

Kiddie tax rules:

• For children under 19 (or under 24 if full-time students), unearned income above a threshold is taxed at the parent's marginal rate
• For 2025, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child's rate, and anything above $2,700 is taxed at the parent's rate

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 serves as custodian and dies, the account is in the donor's gross estate. This catches students who assume custodial accounts are always outside the estate.
• Kiddie tax applies to unearned income above $2,700 (2025) at the parent's rate. The first $1,350 is tax-free, the next $1,350 is at the child's rate.