SHOULD I ADD A JOINT OWNER TO MY FINANCIAL ACCOUNT(S)?

SHOULD I ADD A JOINT OWNER TO MY FINANCIAL ACCOUNT(S)?

Clients frequently ask me questions about adding children or other individuals as joint owners to their bank or investment accounts.  This article will outline some of the positives that result from adding someone as a joint owner to an account.  It will also review some of the cautions that you should be aware of before adding an additional owner to your accounts.  As long as you go into the process of changing account titling fully informed, you can make the educated decision as to whether or not this is the best planning approach for you and your family.

Benefits Of Adding A Joint Owner To An Account:

1. Ease Of Access For New Joint Owner: The new joint account holder will have complete access to the account.  This will allow them to write checks and pay bills from the account, if necessary.  They will be able to make investment decisions such as buying and selling stocks, bonds or mutual funds.  Overall, increased accessibility will provide a level of convenience that might be desirable for individuals who are looking for their children to take on a proactive asset management role as they get older.
2. Probate Avoidance: Joint ownership will result in the entire account transferring to the surviving joint account holder.  Assuming a parent adds a child to an account as a joint owner, and the parent passes away before the child, the account balance will transfer automatically to the child as the surviving joint account holder.  This automatic transfer will allow the assets in the account to pass outside of probate.  This will reduce probate fees in the estate and negate the delay that would result if an executor had to be appointed by the Court to access an individually owned account.
3. Reduced PA Inheritance Tax: An account owned in a parent’s individual name will have its full value subject to a PA Inheritance Tax of 4.5% when the account transfers to their child through their estate or revocable trust.  However, if a child is added to the same account, at least one year prior to the parent passing away, only one-half of the account value will be subject to the 4.5% PA Inheritance Tax.  The Pennsylvania Inheritance Tax will be further reduced if more than one child is added to the account.  For example, if two children are added to the account, the deceased parent will only be considered a one-third owner of the account, thus saving two-thirds of the inheritance tax that would have been due had the account remained in their name alone.
4. No Completed Gift For IRS Purposes: There is no need to file a federal gift tax return (Form 709) because the IRS does not deem the addition of a joint owner to an account to be a completed gift.  This alleviates this potential filing requirement.
5. Step Up In Basis Is Intact: Because the addition of a joint owner to your account is not considered a completed gift and because the IRS still considers you to be the owner of all of the account assets for Federal Estate Tax purposes, there is still a step-up in basis for account assets upon the death of the original account holder.  Therefore, even though the account might have been highly appreciated during your lifetime, the beneficiary would only need to pay capital gains tax on the sale of the account assets if they appreciate beyond the value as of your date of death.

As outlined above, there are some great benefits to adding a joint owner to a personal account.  Like almost everything else in the world, there are potential negatives that must be considered before making a final decision.

Some Cautions Before Adding Joint Owners To Your Accounts:

1. Make Sure You Trust The New Joint Owner: The new joint owner will have complete access to the account assets and can legally remove assets from the account for any purpose.
2. Do You Want The Joint Owner To Inherit The Account? The surviving joint owner will inherit the entire account value upon your passing.  Be aware that the remaining funds in the account will not transfer in accordance with your Will or Revocable Trust, so make sure that this result fits into your estate plan.
3. Additional Creditor Risk: The new joint owner’s creditors and/or divorcing spouse might have an increased ability to go after the funds in this now jointly owned account.
4. Allocation Of PA Inheritance Tax: There will be Pennsylvania Inheritance Tax on at least a percentage of the joint account.  If your last will states that your estate shall pay the estate related taxes, the tax will come out of the estate and not from the surviving joint account owner.  As a result, other estate beneficiaries might bear the burden of paying the tax even though they do not receive the balance of the account.  You can adjust this potential inequity with a simple change to the tax clause under your Will or Trust.  Just make the beneficiary responsible for paying the tax on what they inherit, if that is your desire.
5. You Could Inherit The Account Back Again: If you add someone as a joint account holder and they pass away before you, you will inherit the portion of the account owned by the deceased joint owner.  As a result, you will have to pay PA Inheritance Tax when you inherit the deceased joint account holder’s share of the account back from them.
6. Consider Naming Someone As Power of Attorney:  If you only want to have someone assist you with the management of an account or payment of bills/expenses, it is possible to add someone to an account as Power Of Attorney.  This would not provide the inheritance tax savings or probate avoidance, but it might serve to cover your main goals.

Conclusion:

There is no perfect answer to the question, “Should I add my child as joint owner to my account?”  We have to go through a detailed review of the pros and cons of doing so with each client.  Each person’s goals, desires and tolerances to risk are different.  Ultimately, it is the client’s decision to make after a complete understanding of the implications and how they fit within their own personal circumstances.

Some of the most common planning considerations for our clients are:  Creation of Last Will & Testament, Creation of a Medicaid Asset Protection Trust, use of a Medicaid Compliant Immediate Annuity, qualification for the Family Caregiver Exception, creation of the Caregiver Agreement, Irrevocable Burial Reserve, Monthly Gifting Exception, Elder Law Friendly Financial Power of Attorney, Medical Power of Attorney, Living Will.

Check out our other great articles throughout this site that more specifically address the different ways to protect and preserve your assets.  Click here:  More Articles on How To Protect Your Assets

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For assistance developing a comprehensive estate plan or nursing home asset protection plan in Pennsylvania, please contact Douglas L. Kaune, Esquire at (610) 933-8069 or Email. Doug’s entire practice is focused on elder law, Medicaid application, estate planning, trust planning, estate administration and protection of clients’ assets from nursing home spending and estate and inheritance taxation. Unruh, Turner, Burke & Frees, P.C. is a full service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.