Recently, AARP wrote an article about titling assets jointly with another person. The article has generated well needed dialogue about the pros and cons of joint ownership. The reason that I hear clients telling me they want to name their child as a joint owner on the accounts is to enable access to the money when they cannot. In other words they are doing so for convenience. Many legal issues need to be discussed with regard to joint ownership in terms of deeding, probate, gift and estate taxes, inheritance taxes, and creditor issues.
First, in some states, there is an inheritance tax when a child leaves money to a parent. This was the crux of the article written by AARP. A mother added her daughter to her bank accounts and then her daughter died. An inheritance tax was due because Mom received assets from that joint account. In Maryland, there is no inheritance tax to a parent, grandparent, child, grandchild, or brother or sister. If all the money was originally Mom’s money and Mom dies, 100% of the value of the account is included in Mom’s estate unless it can be established that the daughter contributed money to the account.
When Mom added the daughter’s name on the account, she made a gift to her daughter. If Mom needs to file a Medicaid application in the next five years, the adding of the daughter’s name constitutes a gift and will be subject to the gift penalty rules. Joint ownership means that the daughter automatically receives all the money in that account when Mom dies. The daughter does not have to go through probate. If the daughter withdraws money from the account, the IRS considers it to be a gift from Mom. If she withdraws more than $14,000 per year, then Mom needs to file a gift tax return with the IRS. Even though the daughter automatically inherits the asset at death, the withdrawal of money by the daughter, which was not originally her own while Mom is alive, is considered a gift.
Another complication is if the daughter is sued, her creditors can attach the assets in the joint account even though they were not hers from conception of the account. Because she legally can withdraw all the money from the account, her creditors have a claim against the account.
A better solution for access to the account(s) is with a Property Power of Attorney. As of 2010, Maryland has a Statutory Form that means less hassle with using a Power of Attorney at a bank. The statute states that as long as you sign the Statutory Form Power of Attorney, a bank cannot refuse to honor the document for reasons such as the document was signed more than five (5) years ago or the document must be on a bank’s form.
A final complication of joint accounts is that you may be disinheriting other children. For example, if you have two children, a son and a daughter, and you write a Will leaving everything you own jointly to your children, titling of the account overrules the Will. In other words, when you named your daughter as a joint owner of the account, you disinherited your son. I often hear, “My daughter will give one-half of the money in the account to her brother”. However, the daughter is not legally bound to do so. Experience has shown that once someone has the money, many different sentiments are expressed such as: “Mom added me to the account and I took care of her before she died, so she must have wanted me to have all of the money in the account.”
Emotions can run high when a loved one passes away. See a qualified estate planning attorney to ensure your final wishes are carried out in a loving and peaceful manner.
SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.