Joint Accounts, Inheritance & Taxation Question(s)

[Noobvestor]

I have a few questions around parent/child issues and taxation. It should go without saying but: I'm not asking for any legal advice, but nor am I asking for any suggestions to skip around tax laws - just want to understand the gist of how to legitimately navigate these issues.

Let's say parents want to give their kids a gift, but not the tax hassle.

Can they 'gift' the funds in a joint account, and continue to pay the taxes? I assume not, but wanted to run a few scenarios here.

Let's say parents want to give their kids a gift, but not irrevocably should they need the money in the future.

Can they put the funds in a joint account, have the kids start paying taxes, but then (as shared account holders) pull out the money themselves if they need it without it being a 'reverse gift' of some kind?

Let's say parents want to pass on their home in a more tax-efficient manner.

Is there any legitimate benefit to having the house in their kids names instead or in addition to their own names?

Let's say parents want to pass on their other assets like I Bonds a more tax-efficient manner.

Is there a preferred structure for I Bonds (or other instruments/accounts) between co-ownership, beneficiary, etc...?

Finally: I have most Boglehead-recommended books by Ferri, Swedroe, Swensen, Bernstein, etc... (though not the Boglehead Retirement Guide as such - just the regular Bogleheads Guide) - anyone have a favorite book or section dealing with this stuff?

[sscritic]

From memory:

You have an account. You add a child's name: no gift (yet). The child makes a withdrawal: gift.

Now to google:

If you add an adult child's name to your bank account, the child's withdrawals from the account may be considered gifts. Thus if the child withdraws more than $13,000 from the bank account, you may be liable for gift taxes on the excess amount.

Adding an adult child’s name to your bank account does not result in a completed gift until the child withdraws money from that account. If the child (or sibling or other friend or relative) withdraws more than $13,000.00 from that account in a calendar year, then you must file a gift tax return.

But a house?

Contrary to the joint bank account situation, adding an adult child to the deed is a complete gift at the time it is made. This is so even if you are retaining a traditional life estate in your home and giving only a remainder interest to the child. This is a taxable gift of a future interest based upon the full value of that remainder interest. If it is valued in excess of $13,000.00, then you must file a gift tax return for the year in which the child is “added to the deed”.

There is also a loss of step up at death (at least on the child's portion) according to some. Something doesn't seem quite right about the previous quote, so I will stop and wait for John to correct me.

[sportal]

What is the overall purpose for all the gifting? If it is to transfer the property from the parents estate to the child's estate, then start doing gifting properly. This includes generally making them irrevocable (or placed in a irrevocable trust), and dealing with the tax consequences of the child owning the asset. Or using UTMA/UGMA and paying for eligible expenses from the UTMA/UGMA.

Look into doing an UTMA/UGMA and gifting to the child appreciated assets/shares and then selling within the UTMA/UGMA up to the $1900 mark for 0% tax on long term cap gains this year. Cap gain harvesting. Or $950 at zero taxes, and $950 at the child's tax rate.

Fund a 529 plan for the child.

In general (i.e. you won't be hitting the estate tax exemption), the tax efficient way to pass home ownership is to will the home to the child. This way the child receives a stepped up cost basis upon death, thus saving the child money on taxes when they sell the home.

[sscritic]

I read the question as coming from someone in their sixties or seventies giving assets to a thirty or forty year old. I have never heard of giving your house to your two-year old child, but I am sure it can be done with your irrevocable trust.

[sportal]

Agreed, we probably need to know more information. What is the age of the parent, what is the age of the child? Is the child a minor? What is the purpose of the gifting? Any other relevant details, such as parent's expected estate size at death.

[user5027]

One issue with the joint account scenario is if the child dies, their estate will owe taxes on their share.

[JDCPAEsq]

This is so even if you are retaining a traditional life estate in your home and giving only a remainder interest to the child. This is a taxable gift of a future interest based upon the full value of that remainder interest. If it is valued in excess of $13,000.00, then you must file a gift tax return for the year in which the child is “added to the deed”.

There is also a loss of step up at death (at least on the child's portion) according to some. Something doesn't seem quite right about the previous quote, so I will stop and wait for John to correct me.[/quote]

sscritic - Am I the "John" you are referring to? I think you may be referring to discussions in the recent past about gifts with a retained life estate. Retention of a life estate by the donor results in the asset being included in the donor's estate, notwithstanding the prior gift of the remainder interest. Because of the inclusion the asset takes on a new basis at the death of the donor.
John

[sscritic]

sscritic - Am I the "John" you are referring to? ...

John

You know you are.

[BolderBoy]

Let's say parents want to pass on their home in a more tax-efficient manner.

Is there any legitimate benefit to having the house in their kids names instead or in addition to their own names?

May not be of great value to you, but if avoiding some probate issues is of interest here, you might check as to whether your state allows for "beneficiary deeds" in which you leave your house to a beneficiary or beneficiaries upon your death. Removes that property from the probate-able estate.

In Colorado such have been permitted for a number of years and the cost of me doing this myself (I'm not a lawyer) was $11.00 (filing fee). It only comes into play upon your death and you can name a beneficiary and a bunch of successor beneficiaries as well. Virginia doesn't yet allow for beneficiary deeds.

HTH...

[letsgobobby]

noob, there have been a few threads recently about adding a child's name to a parent's home. The outcome is often problematic. You should read those carefully - I think it's a very risky thing to do.

[Noobvestor]

Thanks for the answers so far! To answer some questions, in turn: correct - we're talking about older (retirement-age) parents gifting to younger (but working-age) children.

The purpose is to pass assets onto the children in a tax-efficient and hassle-free way, while perhaps (per 3 below) retaining some control/ownership on the part of the parents if that's possible. Basically looking for middle ground (trusts, maybe? Shared accounts, probably not?) between gifting and retaining funds.

The factors in play are the following:

1) The obvious: keeping taxes as low as (legally) possible for both parties in the short term

2) Making any end-of-life transition (e.g. house) as tax-painless as possible too

but also

3) Keeping at least some (if not most) assets still accessible to the parents, who aren't sure how much they will need in retirement (they are *probably* fine, and *probably* could gift the 13K maximum to each child every year for the rest of their lives, and *probably* trust that the children would turn around and support them if they went overboard, but want the best of both worlds if possible).

[Peter Foley]

I do not know if this is an acceptable approach or not, but can't you designate a specific acount as payable on death to your children (or beneficiary for certain accounts) instead of your spouse? For example, designate your IRA (or Roth or 401k) to go to your children so as to reduce the size of the estate of the survivor? If this is allowable it would only help to address the estate tax issue for the surviving spouse, not the gifting issue you raise.

[sscritic]

I do not know if this is an acceptable approach or not, but can't you designate a specific acount as payable on death to your children (or beneficiary for certain accounts) instead of your spouse? For example, designate your IRA (or Roth or 401k) to go to your children so as to reduce the size of the estate of the survivor? If this is allowable it would only help to address the estate tax issue for the surviving spouse, not the gifting issue you raise.

ERISA says you need your spouse's permission to name someone other than your spouse as the beneficiary if you have a "plan" covered by ERISA. How's that for circular? Also, the Supreme Court has ruled that plan rules can override beneficiary designations if such designation does not comport with plan rules. (two in a row, plus I got to use comport; I'm on a roll.)

In most 401(k) plans and other defined contribution plans, the plan is written so different protections apply for surviving spouses. In general, in most defined contribution plans, if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must consent by signing a waiver, witnessed by a notary or plan representative.

http://www.dol.gov/ebsa/faqs/faq_consum ... N4jDKXMaU4

Just for some fun letters:

Section 1457(a)(1) of the SBJPA directs the Secretary to publish sample language that can be included in a form that is used for a spouse to consent to a participant's waiver of a QJSA or QPSA. This sample language for use in spousal consent forms is contained in Notice 97-10 in this Bulletin.

And finally, this post would not be complete if I didn't let you read Notice 97-10:
http://www.unclefed.com/Tax-Bulls/1997/Not97-10.pdf