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What Happens to a Joint Account When an Owner Dies?

Income Tax, Estate Tax, and Other Consequences

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If your loved one has died and you're the surviving joint owner of an account held with rights of survivorship or as tenants by the entirety, then you can take over full ownership of the account simply by presenting the deceased owner's original death certificate to the bank or investment company where the account is held. But once you've taken over full ownership of the account, you'll need to understand the tax and other consequences of inheriting the account.

Income Tax Consequences of Inheriting a Joint Account

As the surviving joint owner, once you take over sole ownership of the account you will be responsible for paying the tax on income earned by the account. But what about income earned prior to you becoming the sole owner?

Any income earned by the joint account prior to you taking over sole ownership will be reported in the same manner as it was reported before you took the account over. This means that if the deceased owner was reporting 100% of the income prior to death and his or her other assets aren't subject to probate, then the income earned prior to you taking over sole ownership will be reported on the account owner's final income tax return. Or, if you and the deceased owner were splitting the income tax bill, then the income earned prior to you taking over sole ownership will be reported proportionately on your income tax return and the account owner's final income tax return.

If the account owner's other assets are subject to probate, then then any income earned by the joint account prior to you taking over sole ownership will be reported in the same manner as discussed above except that the account owner's portion of the income will be divided between the final income tax return for income earned before death and the estate income tax return for income earned after death.

Estate and Inheritance Tax Consequences of Inheriting a Joint Account

In general, the fair market value of the entire joint account will be included in the value of the deceased owner's estate if the surviving joint owner isn't a surviving spouse, while only 50% of the fair market value will be included in the value of the deceased owner's estate if the surviving joint owner is the surviving spouse. But how estate and/or inheritance taxes will be apportioned against the joint account depends on whether or not the deceased owner had an estate plan:

  • Deceased owner had an estate plan - If the deceased owner's estate is subject to federal or state estate or inheritance taxes and the decedent had a Last Will and Testament or Revocable Living Trust, then provisions contained in the Last Will or Living Trust will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.
  • Deceased owner didn't have an estate plan - If the deceased owner's estate is subject to federal or state estate or inheritance taxes and the decedent didn't have a Last Will and Testament or Revocable Living Trust, then the laws of the state where the account owner died, or the laws of the state where the property is located if it's real estate, will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.

Do You Have to Pay Any of the Joint Owner's Final Bills?

A common question that comes up when the joint owner of an account held with rights of survivorship or as tentants by the entirety dies owing a significant amount of debt is whether the other owner will be required to use any of the account proceeds to pay off the outstanding debt. In general the answer is NO unless the joint ower co-signed on the debt or personally guaranteed it, but be sure to check with an attorney just to be sure.

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