Put Your Daughter on Your $600,000 Brokerage Account and Only Half of It Gets a Step-Up When You Die. The Other Half Carries Your 1998 Cost Basis Forever, and a Transfer-on-Death Form Would Have Stepped Up All of It
Adding your child to a brokerage account for convenience sounds harmless, but the IRS and your broker may quietly split that account in two the moment you die, leaving decades of gains exposed to taxes that a single form could…
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A 74-year-old widow put $100,000 into index funds in 1998. Years later she adds her daughter to the brokerage account so someone can pay the bills if she ends up in the hospital. The broker approves the paperwork the same day.
She dies in 2026, when the account is worth $600,000. Her daughter sells everything, and the next tax form from the broker shows a $250,000 gain. If her mother had signed a transfer-on-death (TOD) form instead, the daughter would have had no gain to report.
Your Broker Probably Steps Up Only Half of a Joint Account
The rule that matters here is the step-up in basis under 26 U.S.C. § 1014(a)(1). When you inherit property, your basis (the cost the IRS measures your gain from) becomes “the fair market value of the property at the date of the decedent’s death”. Decades of growth drop out of the tax calculation.
A joint account complicates this. On paper, the daughter already owned the account the day before her mother died. Brokers usually handle that with a default setting. In a Reddit thread on Fidelity Investments’ customer forum, one reply said the firm’s cost-basis adjustment includes “a 50% step-up for joint account registrations with two owners.”
Under that default, the mother’s half resets to its value on the date of death. The daughter’s half holds half of the 1998 original cost basis.
How Section 2040 Decides Whose Half Steps Up
The law requires a 50/50 split. Under 26 U.S.C. § 2040(b)(1), when spouses own property jointly, one-half of its value goes into the estate of the first spouse to die. In community property states such as Arizona, California and Texas, the surviving spouse gets a step-up on the total fair market value of the community property even though only one spouse passed away.
A parent and child fall under § 2040(a), which looks at who paid. The parent’s estate includes the full value of the account, minus any part the survivor can show came from her own money. If Mom funded every dollar, the whole account belongs in her estate. § 1014(b)(9) then gives a step-up to property included in the estate because of its “form of ownership.”
So the daughter can claim a full step-up, but she has prove it that the mother paid for all the investment. She’ll need to override the broker’s 1099-B with deposit records going back to the late 1990s. Any money she put in herself holds its original cost basis. Some brokers won’t update this on their end, therefore taxpayers often need to work with their CPA to make this adjustment at time of filing their tax return to report the sale.
Worked Example: $37,500 in Federal Tax Over a Registration Form
Assumptions: the daughter is single, she sells in 2026 for the value on the date of death, and the entire gain is taxed at 15%.
| Line | Joint Account (Broker Default) | TOD Registration |
|---|---|---|
| Mother’s half, stepped-up basis | $300,000 | n/a |
| Daughter’s half, 1998 basis | $50,000 | n/a |
| Total basis | $350,000 | $600,000 |
| Taxable gain on sale | $250,000 | $0 |
| Federal tax at 15% | $37,500 | $0 |
Long-term gains are taxed at 0%, 15%, 20% for most investments, so a higher earner could owe more. A gain this large can also trigger the net investment income tax once an single taxpayer’s modified adjusted gross income passes $200,000. Most states add their own income tax on top.
Putting the whole account in Mom’s estate rarely costs anything. Estates of people who die in 2026 get a basic exclusion of $15,000,000.
Why a Transfer-on-Death Form Steps Up Every Dollar
With TOD registration, the account stays in the owner’s name alone until death. The daughter owns nothing beforehand. At death the entire account goes to her and takes a date-of-death basis under § 1014, so she doesn’t need deposit records or a fight with the broker.
Adding a co-owner can also create gift-tax paperwork. When one person’s money buys property titled jointly with survivorship rights, 26 CFR 25.2511-1(h)(5) treats it as “a gift to B in the amount of half the value of the property.” If the owner can take back the whole fund without the co-owner’s consent, (h)(4) instead treats the gift as happening when the co-owner withdraws money for her own use. Which rule applies depends on the account agreement. The 2026 annual gift exclusion is $19,000, and half of a large account blows past it.
Joint ownership also puts the account within reach of the co-owner’s creditors and a divorce court. A TOD registration keeps both away until the owner dies.
Titling, beneficiary forms, and account registration are where most estate messes actually start. We put the full cleanup checklist in a free guide here: Die With a Plan.
Three Moves to Make Before the Account Changes Hands
- Switch convenience joint accounts to TOD. If your child is on the account only to help with bills, ask the broker to put it back in your name alone with a TOD beneficiary. A durable power of attorney can cover bill paying. Retitling an account doesn’t sell your shares.
- Holds the deposit records. If an account stays joint, save statements showing the money came from you. That’s the proof a survivor needs to claim the full step-up under § 2040(a).
- Check the 1099-B before filing. If a parent funded the whole account and the form shows only a 50% step-up, ask the broker to correct it. You can also report the higher basis on Form 8949 and holds the supporting records with your return.
Contribution history, gift treatment and state law can all change the result, so it’s worth running the numbers with a CPA or estate tax attorney before you retitle anything.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
