Joint Tenancy with Right of Survivorship (JTWROS)
JTWROS is the default titling choice for most married couples, yet it contains legal and tax traps. Adding a non-spouse as a joint tenant — an adult child on a bank account “for convenience” is the classic case — can be a taxable gift, and when depends on the asset. Under Treas. Reg. §25.2511-1(h)(4), creating a joint bank account is not a completed gift at all; the gift occurs only when the non-contributing party withdraws funds for their own benefit. A joint brokerage account is different: because the new owner can immediately trade and withdraw, the gift is complete on creation, in the amount of their fractional interest. Either way, transfers above the annual exclusion ($19,000 per donee for 2026) trigger a Form 709 filing obligation.
Convenience is rarely worth this. If the goal is letting an adult child pay your bills, a durable power of attorney or an authorized-signer designation accomplishes it without transferring ownership, without the gift, and without exposing the balance to the child’s creditors and divorce (section “Incapacity Planning”).
The Cost of the Wrong Title. The fractional step-up associated with JTWROS carries a severe, measurable tax penalty for married couples holding highly appreciated portfolios. Consider a couple who established a $1,000,000 brokerage portfolio that has appreciated to a $5,000,000 fair market value. Upon the death of the first spouse, the survivor decides to reallocate the holdings to mitigate factor risk.
If the account is titled as JTWROS, only the decedent’s 50% share receives a basis step-up to current fair market value. The survivor’s new basis is $2,500,000 (the stepped-up half) plus $500,000 (their original cost basis in the survivor’s half), totaling $3,000,000. Selling the portfolio to reallocate immediately realizes a taxable capital gain of $2,000,000.
If the account is instead titled as Community Property—or community property with right of survivorship— IRC §1014(b)(6), “Basis of property acquired from a decedent” steps up both halves of the property to the full $5,000,000 value upon the first spouse’s death. The survivor’s basis becomes the full $5,000,000, and subsequent liquidation realizes zero taxable gain. At a 23.8% federal tax rate (the 20% maximum long-term capital gains rate plus the 3.8% Net Investment Income Tax), this simple titling decision yields $476,000 in federal tax savings—excluding additional state-level income taxes.
For residents of common-law states, this double step-up is generally unavailable through standard joint titling, though a handful of states (Alaska, Tennessee, South Dakota, Kentucky, Florida) permit elective community property trusts to secure the same treatment. See section “Capital Gains Resets With Inheritance” for step-up mechanics.
Two refinements the standard version of this analysis omits. First, the 50/50 split above is a statutory rule for spouses, not non-spousal co-owners. Under IRC §2040(b), “Joint interests”, a qualified joint interest between spouses is deemed half-owned by each regardless of who actually contributed — which is why only half steps up. For a non-spouse joint tenancy, IRC §2040(a) runs the opposite way: the entire value is included in the deceased joint tenant’s estate except to the extent the survivor can prove they contributed. That is usually described as a trap, and for estate-tax purposes it is. But estate inclusion drives basis, so a child who contributed nothing to a joint account with a parent receives a full step-up on the whole balance at the parent’s death. Under the $15 million exemption that outcome is often strictly better than the fractional step-up a spouse would get. Know which subsection you are under before assuming joint titling costs you basis.
Second, the double step-up cuts both ways. IRC §1014 adjusts basis to fair market value, in either direction. On a portfolio that has fallen below basis, community property titling steps both halves down, destroying a loss the survivor could otherwise have harvested, while JTWROS preserves basis on the survivor’s half. The community property election is the right default for appreciated assets and the wrong one for depreciated assets — which argues for holding depreciated positions separately, and for reviewing titling after a major drawdown instead of leaving ownership on autopilot.