In the old movie The Princess Bride, one of the primary characters constantly uses the word “inconceivable.” Eventually, one of the other characters says, “I do not think this means what you think it means.”

 

The same thing applies to using Joint Tenants with Rights of Survivorship (JTWROS) as an estate planning tool. There are times when JTWROS is exactly the right thing to do and it works perfectly well. But if it becomes necessary to help Mom or Dad with their finances and they want to add you to their accounts so you can write checks for them and make sure their obligations are met, there can be unintended consequences and “I do not think JTWROS means what you think it means.”

 

For decades, the approach that seemed to make the most sense was adding one of the adult kids to the bank account. That way if something happened, the child could immediately take over and the parent’s finances would be handled without missing a beat.

 

Let’s say mom is a widow and her daughter, Sally is added to a bank account. Sally becomes a joint owner of the account. Generally, joint accounts are set up as Joint Tenants with Rights of Survivorship (JTWROS), which means when mom dies, all the assets in that account automatically transfer to Sally. But it can cause problems. For example:

 

  • If the intent was for Sally to help mom with her finances, and at mom’s death the remaining assets were to be distributed to all the heirs—it won’t happen. Because Sally’s name was on the account, everything left in the account at mom’s death is automatically transferred to Sally.

 

  • If anyone other than a spouse is added to an account, it can trigger a federal gift tax issue.
    • There is an annual gift tax exclusion that allows you to give away a pre-determined amount of money to anyone you want with no tax consequences. The amount changes every year to adjust for inflation. For this example, we’ll say the annual exclusion is $18,000. Mom has a $100,000 account and she’s added Sally’s name making Sally a co-owner of the account (JTWROS). If Sally makes a $20,000 withdrawal, she is considered to have received a gift $2,000 above the gift tax exclusion. In most cases, mom will have to file a gift tax return.

 

  • If mom adds Sally to the $100,000 account and Sally dies before her mom, a portion of the account value could be includable in Sally’s estate for state inheritance and/or estate tax purposes. In this case, the assets would transfer back to the parent, and depending on the deceased’s state of residence, tax could be due on as much as 50% of the account value.

 

  • All funds held in the account are available for withdrawal by either owner during the life of the account, regardless of which owner deposited the funds into the account. It’s not uncommon for an adult child added to mom or dad’s account to use the funds for their own use. The law regards this as a crime called elder financial abuse.

 

Another Option

The question becomes, what is the reason for adding someone’s name to your account. If the reason is because you need help handling your finances, or it’s just in case you become incapacitated, then consider setting up a financial power of attorney.

 

The Financial Power of Attorney (FPOA) names a person to handle finances on your behalf up to the point of death. The Financial POA needs to be someone you trust, and it’s beneficial if that person has some knowledge and experience with finances. You’ll want to acquaint that person with your financial situation and where they can find your financial records and documents.

 

But, maybe, you don’t want one person to have the power to handle all your financial matters. In that case, you can set up a limited financial power of attorney. A limited FPOA gives your agent the authority to act for you only in specific instances, for example, writing checks or cashing checks or depositing checks. In this case, your agent cannot conduct any other financial business for you.

 

Transfer on Death

But if the purpose of adding someone’s name to your account(s) is for estate planning purposes, then designating those accounts as Transfer on Death (TOD) may be a much better solution.

 

TOD allows you to name one or multiple beneficiaries to your account(s), and as the name implies, at your death the assets in those accounts are transferred to the individuals you named. The advantages include:

  • Bypassing probate. Assets in TOD accounts are not included in your estate.
  • Beneficiaries don’t have access to the assets until the account owner dies. So, the IRS says adding beneficiaries to the accounts is not considered a gift and there is no gift tax issue.
  • If a TOD beneficiary passes away before the account owner, the deceased beneficiary did not receive any assets, therefore there is no state inheritance tax issue.

 

Other JTWROS Issues

So far, we’ve talked about potential issues created by adding someone, usually an adult child, to mom or dad’s account to help them take care of their finances. But JTWROS can even have unintended consequences between spouses.

 

JTWROS property owned by a married couple would pass to the surviving spouse upon the death of one of the spouses. If the surviving spouse is receiving a government benefit, such as Medicaid, the inherited asset could potentially cause a loss of benefits due to excess resources and force the surviving spouse to privately pay for care. The loss of government benefits could potentially be far more costly than probate.

 

Unintentional disinheriting could happen. For example, when blended families are involved with children from previous marriages, one spouse may die and the survivor becomes the owner of the property. When the survivor dies, the property goes to their children, leaving nothing for the deceased spouse’s children.

 

Also, Joint Tenancy makes it more difficult to sell or mortgage property because it requires the agreement of both parties, which may not be easy to get.

 

The old days of just adding someone to your accounts to help you are gone. Today, the IRS rules are so long and complex that you need to plan ahead. The best of intentions, like making an account Joint Tenants with Rights of Survivorship, may cause problems you don’t want and don’t expect.

 

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.