Sometimes people will add their parents to be a co-owner of their own accounts for a variety of reasons. These reasons range from convenience to paying for the parents’ bill to facilitating transfers of money between parent and child.
So, what are some issues to consider when you add an elderly parent as a co-owner of your checking account? A recent advice article on nj.com, “Is having a joint bank account with my father going to cause any problems?” points out a few, using an example where a father is added to his adult son’s account in order to transfer money to the son.
The dad is a named joint holder of the account, so he can withdraw some or all of the funds in the checking account at any time. For gift tax purposes, this means the transfer is neither a completed gift nor a payment from the father to the adult son until the son withdraws funds. This can make for a confusing situation regarding whether you need to file a gift tax return if the transfer exceeds the exemption amount of $15,000.
Another issue to consider is what would happen if and when the dad dies while the son is still alive. Because the account is held in both their names, the amount in the checking account would be included in the father’s taxable estate. There may be taxes due on the estate, depending on the size of the estate and the state inheritance or transfer tax laws of the state in which he lives. In New Jersey, for instance, an inheritance tax may be due, although there is a procedure where a tax waiver would need to be obtained to release the funds to the son in this case.
If the adult son dies before his dad, the checking account funds would automatically pass to the father by operation of law, and not pursuant to the terms of the son’s will, nor to his children or spouse.
Keeping both people on the name of the account may also mean the funds are at risk of scams or creditors of both people. In light of the fact that the dad can withdraw the funds during his lifetime as a joint holder of the account, those funds in the checking account are subject to him being a victim to scams. A joint account may also be subject to legal judgments, collections, and other debt collection efforts.
To safeguard these funds, the adult son should take the time to properly title the checking account. If the transfer of funds was a gift to the son in excess of $15,000, the father would also need to file a Form 709, U.S. Gift and Generation-Skipping Transfer Tax Return, even if no tax is due because the federal gift and estate tax exemption is at $11.4 million per person.
If the transfer was made by the father to qualify for Medicaid, it is important to understand that the Medicaid five-year look-back period and penalty could be an issue. The lookback period begins from the time of the application in California, but this may vary by state. Any gifts or transfers made within this period are added together to calculate a penalty period for which Medicaid benefits are denied. Since the transfer isn’t complete until the son removes his father’s name from the account, for purposes of Medicaid qualification, it would be best to remove the father’s name as soon as possible to start the clock.
While joint accounts are sometimes useful to have, be sure that you understand its implications before you decide to rely on it long-term.
Reference: nj.com (September 25, 2019) “Is having a joint bank account with my father going to cause any problems?”