Adding a joint bank account owner. Is it considered a gift?

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mr_scaramanga
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Adding a joint bank account owner. Is it considered a gift?

Post by mr_scaramanga »

[merged two threads - admin alex]

I am trying to find out if creating joint bank accounts is a way to avoid paying inheritance taxes in the state of PA.

My uncle is in his 80's and his will has my mother (who is my uncle's sister), brother, and myself as the sole beneficiaries of his estate (mom gets 50%, brother and I get 25% each.) He never married and has no children. If you add up the value of his house and and all other liquid and Illiquid assets, you get about $1.2 M. Last year we worked with an estate attorney to create an irrevocable trust (my mother is the trustee) into which his home and all his taxable mutual funds were placed. The only assets he decided to leave outside of the trust were a combination of CD's and money market accounts totaling $180K and a group of EE bonds worth about $40K presently.

Put aside the wisdom of having that much money liquid. He's very conservative and wants to make sure he can pay for most unforeseen expenses and he won't change his change mind about that. His living expenses are currently being paid by his LTC policy (he lives in assisted living) and that will last for 5 years. One reason I think he wants to have that cash available is so he can keep paying living expenses when LTC runs out.

So, PA's inheritance tax is 12% on assets to my mom and 15% on assets to me with a one year look back period. I have these questions:

1.) If we ask my uncle to make my mom, brother, and myself joint account holders on his bank accounts, is that the equivalent of him giving us 3/4 of all the assets in his account? If so, would that require him to file a federal gift tax form?

2.) Assume my mother, brother, and I become joint account holders and my uncle dies. What portion of those bank assets are considered "his" for purposes of inheritance? Would it be just 1/4 of the total? Would only that 1/4 be considered taxable by the state? Assume 1 year has passed since the accounts were made joint?

3.) Any ideas about a better way to handle this? One concern that pops up into my mind is can creditors for any one of the four of us get a claim on all the assets? The one thing I am not concerned about is anyone stealing - we are a very close family and my uncle actually asked me to look into this.

Thanks
Topic Author
mr_scaramanga
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Joined: Fri Feb 06, 2015 11:04 pm

Adding a joint bank account owner. Is it considered a gift?

Post by mr_scaramanga »

Say a parent is the sole owner of $100K in a bank MM account. Let's also say that they decide to make one their only child a joint account holder on this account.

For federal tax purposes, has this parent just given this child a $50K gift, necessitating the filing of a gift tax form?

Could the child's creditor's come after the funds in that bank account? Could the creditors potentially get at the whole $100K?

Say the child inherits the entire $100K account when the parent dies. For state inheritance tax issues (I'm interested mainly in PA tax law) did this child inherit $50K or $100K?

Thanks
Netherworld
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Re: Adding a joint bank account owner. Is it considered a g

Post by Netherworld »

I believe federal gift tax rules consider that adding another to a joint bank account is a revocable decision and not a completed transfer. A gift may occur, however, if and when the joint account holder withdraws funds for his/her own use. My source is a Gilbert's law summary on Estate and Gift Taxation at secion 874 (citing Treasury regulations). Don't know what impact this may have on your state's creditor rights and state taxation rules. You should probably consulting a licensed PA attorney.
JW-Retired
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Re: Adding a joint bank account owner. Is it considered a g

Post by JW-Retired »

Why do you want to do this? Maybe there is a safer way to accomplish what your mission is?
JW
Retired at Last
harrylime
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Re: Adding a joint bank account owner. Is it considered a g

Post by harrylime »

mr_scaramanga wrote:Say the child inherits the entire $100K account when the parent dies. For state inheritance tax issues (I'm interested mainly in PA tax law) did this child inherit $50K or $100K?

Thanks
For PA Inheritance Tax only: If the parent survives the child for one year after making the child a joint owner, then only 1/2 of the account value would be subject to inheritance tax. (3 joint owners, then only 1/3rd, 4 joint owners, then 1/4th. And so on.) PA does not care who did or did not contribute what to the account. Only that the gift giver survives for one year after making the gift.
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mr_scaramanga
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Re: Adding a joint bank account owner. Is it considered a g

Post by mr_scaramanga »

JW Nearly Retired wrote:Why do you want to do this? Maybe there is a safer way to accomplish what your mission is?
JW
It relates to estate planning and PA inheritance tax. PA has a 4.5% inheritance tax for child beneficiaries and 12% and 15% taxes for other relatives and non-relatives. There is a one-year look back period. The person who owns these funds wants to keep control for bill paying purposes but also wants to lower the inheritance tax burden for their heirs.

One way I thought of doing this was to make themselves a joint account holder with some of the heirs thinking that would lower the amount of taxable inheritance by each heir. However, if that does not work, the other alternative I was thinking was for them to just turn over the entire account to the heir or heirs they trust the most.

The only issue with this is that they then rely on their heirs for all bill paying needs. Maybe the new account owners (the heirs) could just sign whole books of checks for the original account owner to use? Maybe make the original account holder an authorized user on the debit/ATM cards (not sure if this still makes them an owner of the funds though.)
Topic Author
mr_scaramanga
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Re: Adding a joint bank account owner. Is it considered a g

Post by mr_scaramanga »

harrylime wrote:
mr_scaramanga wrote:Say the child inherits the entire $100K account when the parent dies. For state inheritance tax issues (I'm interested mainly in PA tax law) did this child inherit $50K or $100K?

Thanks
For PA Inheritance Tax only: If the parent survives the child for one year after making the child a joint owner, then only 1/2 of the account value would be subject to inheritance tax. (3 joint owners, then only 1/3rd, 4 joint owners, then 1/4th. And so on.) PA does not care who did or did not contribute what to the account. Only that the gift giver survives for one year after making the gift.
Thank you so much. That answers my most important question. Now, do you know if the IRS considers making someone a joint owner a taxable gift? So, would the original account owner have to file a gift tax form for a $50K gift to the new joint account holder?
user5027
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Re: Adding a joint bank account owner. Is it considered a g

Post by user5027 »

I was told a downside to this is if the child predeceases the parent. The parent will owe PA Estate Tax on the child's portion of the account. Not saying you should not do it, only consider what you expect to happen, may not.
Topic Author
mr_scaramanga
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Re: Adding a joint bank account owner. Is it considered a g

Post by mr_scaramanga »

user5027 wrote:I was told a downside to this is if the child predeceases the parent. The parent will owe PA Estate Tax on the child's portion of the account. Not saying you should not do it, only consider what you expect to happen, may not.
Thanks. I did not think about that. So, if the child has children of their own, I wonder if they would inherit half of the grandparent's account and pay the 4.5% inheritance tax at the time of their parent's death. At that point I wonder if the original account could stay intact or if it would have to be split into two accounts - one owned by the grandparent and one owned by the grandchildren?
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runner9
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Re: Avoiding state inheritance taxes on bank savings

Post by runner9 »

I would be concerned about it being considered a gift as soon as it's done.

Maybe this bump will help with other, more experienced, opinions :D
harrylime
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Re: Adding a joint bank account owner. Is it considered a g

Post by harrylime »

user5027 wrote:I was told a downside to this is if the child predeceases the parent. The parent will owe PA Estate Tax on the child's portion of the account. Not saying you should not do it, only consider what you expect to happen, may not.
Yep, that is correct.
Grt2bOutdoors
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Re: Avoiding state inheritance taxes on bank savings

Post by Grt2bOutdoors »

Move residences - that is the best way to avoid inheritance taxes.
Alternatively, consult with an experienced estate planning attorney. With assets like that and potential tax burden, I think the attorney costs less.
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