Please Don't Show Me the Money!

[REWahoo]

OK all you would-be tax experts, here’s a question for you:

A few years ago, my friends FIL told his daughter (my friends spouse) he wanted to “put her name” on one of his savings accounts so she could get to some of his savings if he got ill and needed money for medical treatment. His FIL is a widower, in his 80’s and lives alone. He has two children, a son who lives 1,500 miles away and visits once a year, and his daughter, 150 miles away who visits at least once a month.

My friend told his spouse that he was concerned about the tax consequences of her being a joint owner of an account for both her and her dad. He was also concerned about the tax and estate issues once his FIL passed away. Last but not least, he was concerned that it might cause friction between his wife and his BIL when and if his BIL became aware of what FIL had done.

My friend suggested to his spouse and his FIL they look into some sort of power of attorney for medical needs, but the FIL was not comfortable with that idea. The compromise was to open a small CD in both the dad and daughter’s name. The account read “Mr. FIL or Mrs. Daughter”. My friend wasn’t comfortable with the idea, but his FIL is one of those old guys that decides what he wants to do and does it, regardless of the consequences. My friend said he tried to forget about it and hoped they wouldn't get a letter from the IRS.

Fast forward 3 or 4 years. My friend discovers that FIL has been adding money to the account without his or his wifes knowledge and it now totals a couple of hundred thousand dollars! He discovers this when they are visiting and her dad gives her the latest bank statement and asks her to contact the bank and have them send him a check for $100K from the account when the $200K CD matures at the end of the month.

The daughter has never withdrawn any money from the account or had any interaction with the bank regarding the account since signing the papers opening the account years ago. The mailing address for the account is and always has been her fathers address.

My friend thinks I’m a financial wizard (you retired early didn’t you?) and asked me what he should do. I said “Let me think about it and I’ll get back to you.”

What’s the tax liability for my friend and his spouse, if any? What should they do?

Make me look good...

 

[Lusitan]

Let's hope we got a tax lawyer around who will weigh in on the matter.

Meanwhile - does your friend have any idea whether his FIL has been reporting the interest from this account on his (the FIL's) tax return, and paying taxes on it?

 

[REWahoo]

Meanwhile - does your friend have any idea whether his FIL has been reporting the interest from this account on his (the FIL's) tax return, and paying taxes on it?

I'm pretty sure the FIL has been both reporting the interest income and paying the taxes on it.

 

[LOL!]

My MIL hated to pays taxes.  She hated it so much she bought tax-free muni bonds even though she was in the 0% tax bracket.  She wanted to cheat the IRS when she died as well, so she had many accounts with her children's names on them as joint owners.  But since she was the only one contributing to these accounts, and there was no record of any of her kids contributing to the accounts, and her social security number was the primary one on the account, they were all wrapped up in her estate.  Her kids had no tax liability per se from being joint owners of the accounts.

Now when she died, these joint accounts were a little messy because the joint owner then received interest and dividends as "nominee" interest for the estate of mom.

Full disclosure: I am not a tax lawyer, but a tax lawyer did MIL's estate taxes and final tax returns.  These "joint" accounts really had no special tax benefit and did not pass outside of probate.  This was state of Louisiana which even includes "payable on death" account in the estate of the deceased.

 

[Gone4Good]

What’s the tax liability for my friend and his spouse, if any?  What should they do?

It goes without saying (although I'll say it anyway) that what they should do is consult a tax professional.  

Having said that, and having disclosed that I am not a tax professional, I'll offer my two cents.  

I do not think your friend has any tax liability.  It seems to me that the deposits into the joint account might be construed as a gift - although considering the fact that your friend has never drawn from the account it is debatable as to whether he has ever taken possession of the gift.  Nevertheless, gift taxes are owed by the gift giver, not the recipient.  So in this case, any tax liability falls to the FIL.  It's unclear, however, whether the deposit in and of it self triggers a taxable event for which the FIL should report - I wouldn't think so but I don't know for sure.  

 

[Nords]

Fast forward 3 or 4 years.  My friend discovers that FIL has been adding money to the account without his or his wifes knowledge and it now totals a couple of hundred thousand dollars!  He discovers this when they are visiting and her dad gives her the latest bank statement and asks her to contact the bank and have them send him a check for $100K from the account when the $200K CD matures at the end of the month.

I share your pain, although not on that scale!

The bank has been sending someone the 1099-INTs for the account, and if they're not going to your friend's spouse then they're almost certainly going to her father. If he hasn't been paying the taxes the IRS computers would have matched that one pretty quickly and followed up with a letter. (I don't want to get into how I learned that.) So I would suspect that there's no tax liability to the daughter that hasn't already been taken care of.

If the joint account is going to continue then it should be registered as "Payable on Death" (POD) or "Transfer on Death" (TOD).

It's very handy to have a joint signer on an account. But if everyone is feeling uncomfortable then the father could always gift the daughter the $11K/year (or whatever it is now) and ask her to bank it. She could pay the taxes from the interest.

An ancient family story is a frail elderly father who told his daughter that he wanted to convert some savings bonds from "Father & daughter" to just her name. Being from the old country and a good bit paranoid, he didn't trust the government and he wanted her to have these assets in her name before the lawyers & executor got involved. She agreed, thinking it was a handful of bonds, and received a 40-pound shopping bag of paper. Of course the conversion was deemed a taxable event and cost quite a bit of money (which was paid out of the bonds). She still regrets that she didn't just put the shopping bag in a safe deposit box, say "Yes, Dad, I took care of it", and then inherit them tax-free when he passed away.

 

[Jarhead*]

OK all you would-be tax experts, here’s a question for you:

A few years ago, my friends FIL told his daughter (my friends spouse) he wanted to “put her name” on one of his savings accounts so she could get to some of his savings if he got ill and needed money for medical treatment.  His FIL is a widower, in his 80’s and lives alone.  He has two children, a son who lives 1,500 miles away and visits once a year, and his daughter, 150 miles away who visits at least once a month.

My friend told his spouse that he was concerned about the tax consequences of her being a joint owner of an account for both her and her dad.  He was also concerned about the tax and estate issues once his FIL passed away.  Last but not least, he was concerned that it might cause friction between his wife and his BIL when and if his BIL became aware of what FIL had done. 

My friend suggested to his spouse and his FIL they look into some sort of power of attorney for medical needs, but the FIL was not comfortable with that idea.  The compromise was to open a small CD in both the dad and daughter’s name.  The account read “Mr. FIL or Mrs. Daughter”.  My friend wasn’t comfortable with the idea, but his FIL is one of those old guys that decides what he wants to do and does it, regardless of the consequences.  My friend said he tried to forget about it and hoped they wouldn't get a letter from the IRS.

Fast forward 3 or 4 years.  My friend discovers that FIL has been adding money to the account without his or his wifes knowledge and it now totals a couple of hundred thousand dollars!  He discovers this when they are visiting and her dad gives her the latest bank statement and asks her to contact the bank and have them send him a check for $100K from the account when the $200K CD matures at the end of the month.

The daughter has never withdrawn any money from the account or had any interaction with the bank regarding the account since signing the papers opening the account years ago.  The mailing address for the account is and always has been her fathers address.

My friend thinks I’m a financial wizard (you retired early didn’t you?) and asked me what he should do.  I said “Let me think about it and I’ll get back to you.”

What’s the tax liability for my friend and his spouse, if any?  What should they do?

Make me look good...

Wahoo: Good one. You should get some interesting solutions.

I'm still laughing picturing the scene in the living room, "Oh by the way have them send me a check for $100,000 when the CD expires."

Beings the bank is obligated to send the IRS interest earned statement, apparantly they are using the old guys Soc. Sec. #, and he is paying taxes, (hopefully) so probably no big deal as far as your friends are concerned. (Especially because they haven't withdrawn any funds, and should continue this practice).

How this will play out at the time of his death, if he has a substantial amount in the CD

In any case, I'm going to try and remember this one for my kids in about 15 years.

 

[Brat]

Years ago my widowed grandmother put one of her daughter's name on her bank account as a joint owner so that she could pay her bills when she could not.  The other siblings were told that this was for convenience sake and recommended by the bank. 

Need I say that when she passed the daughter claimed all the money in the bank, as well as an equal share of all the other assets.  Pop was pi...d and didn’t speak to that sister’s family again! 

Sometimes there is more than money at stake.

 

[REWahoo]

I'm still laughing picturing the scene in the living room, "Oh by the way have them send me a check for $100,000 when the CD expires."

I noticed a large bruise on my buddy's chin. I think that's where it struck the table when his jaw dropped.

How this will play out at the time of his death, if he has a substantial amount in the CD

He's asking the same question and is worried it could really complicate things when the FIL expires.

Need I say that when she passed the daughter claimed all the money in the bank, as well as an equal share of all the other assets. Pop was pi...d and didn’t speak to that sister’s family again!

Sometimes there is more than money at stake.

True. My impression is my friend is as concerned about the family relationship as he is the financial issue.

 

[lazygood4nothinbum]

i had the same notion as "3 yrs to go" on putting someone's name on an account but i've no idea as i'm neither a tax guy nor accountant and i'm only now learning much of this financial stuff from you guys (for which i am ever-so grateful, thanx). i can say for certain, however, that the current tax free gifting has been increased to $12k this year outright with unlimited gifting for medical and educational purposes if the check is written out directly to a provider, not as reimbursement. i believe the gift tax above that amount or beyond that scope is 47% or so.

my comment here applies to the poa (power of attorney) you mentioned. having been co-guardian for my mother for four years now and involved in the community of caregivers for 12 years, i can't stress how important it is to have proper & detailed poa for financial matters and durable poa for medical decisions. i would stress with most emphasis the durable poa. it is an incredible burden to have to make life and death decisions for another human being. and it is shocking how so many parents who spent so much time making sure we are independent, later drop the ball on their own lives so that we have to live it for them.

even my mom who did the normal good job that you are supposed to do in preparation for late stage of life, well, gotta tell ya, it just wasn't enough.

 

[larry]

Just a simple comment, this is a very good thread and extremely timely.

 

[cute fuzzy bunny]

I'll take a stab because that'll cause the people who actually know about taxes to hop in and tell me why i'm wrong

As long as someone is paying the taxes, there wont be a problem. When the co-holder of the account passes away, any basis or unpaid taxes or other unpaid or unassessed burdens, or taxes generated from sale will drop into the pocket of the surviving co-holder of the account or asset. What i'm not sure of is any step-up in basis. I think for co-holders of property and bank accounts and other cash assets, step ups are only available in some instances where the property is held with a right of survivorship and the co-holder is a spouse.

 

[SteveR]

If you co-own an asset you also co-own the same basis as the other co-owner. If the other co-owner dies, you now own the asset with its original basis. I believe the only way to get a stepped up basis is if you are not the owner or co-owner and receive the asset only as a beneficiary. Only certain assets can have a stepped up basis (mostly stocks etc. and not other tangible assets like houses).

 

[Martha]

Maybe you want to wait for the tax accountants.

This is how I think it works: The 1099-INT has to be going somewhere. If to her father and he is paying the tax, then she doesn't owe any tax. If she got a 1099-INT, she should report the interest as received as a nominee, not pay taxes on it, and 1099 her dad.

If her father has a taxable estate, the account/cd will be included in the estate and estate taxes paid on those funds. However, as Brat says, if the account is joint, the daughter will get the account proceeds. If the will provides assets are divided equally, that asset will not be distributed under the will. So she would be entitled to an equal share with her sibs of assets that are distributed under the will. The will, of course, can be drafted to address this issue. Also, I have seen "good children" equalize unequal distributions after the death of their parents.

Remember my standard disclaimer below.

 

[larry]

As long as someone is paying the taxes, there wont be a problem.

I think that's the whole problem right there. As long as someone is paying the taxes...

 

[Martha]

BTW, an asset held jointly with someone other than a spouse is included in the taxable estate of a deceased person to the extent of the deceased person's contribution to that asset. And there is a stepped up basis to extent asset is included in an estate.

For example, if dad and daughter jointly held title to a house that dad originally purchased, the house would be included in the dad's estate for estate tax purposes and daughter would have a stepped up basis.

 

[REWahoo]

Also, I have seen "good children" equalize unequal distributions after the death of their parents.

Based on what I was told, I think that's what the daughter would do, but my friend is concerned it will result in paying gift taxes and both the daughter and her brother will end up with less than if she didn't co-own the account.

As I see it, the basic questions I need to answer for him are:

- Do they have any current tax liability resulting from her being co-owner? Based on the responses so far, if her dad is getting a 1099 and paying taxes, they should be OK.
- If the FIL's will splits his estate between his son and daughter and this co-owned account is not specifically addressed, would it be better if she were not a co-owner? The question is from a tax standpoint...from a "keep peace with her brother" standpoint, there is no question she shouldn't co-own the account.
- If she shouldn't be the co-owner, how does she back out of it without ticking her dad off? That could be a challenge based on what I've heard about him.

Thanks Martha and all who have responded.

Tax accountants, where are you?

 

[Martha]

Based on what I was told, I think that's what the daughter would do, but my friend is concerned it will result in paying gift taxes and both the daughter and her brother will end up with less than if she didn't co-own the account.

As I see it, the basic questions I need to answer for him are:

- Do they have any current tax liability resulting from her being co-owner? Based on the responses so far, if her dad is getting a 1099 and paying taxes, they should be OK.

I think so long as she isn't getting a 1099 she is fine. Even if dad doesn't pay his taxes.

- If the FIL's will splits his estate between his son and daughter and this co-owned account is not specifically addressed, would it be better if she were not a co-owner? The question is from a tax standpoint...from a "keep peace with her brother" standpoint, there is no question she shouldn't co-own the account.

Yeah, it would be best. Otherwise, she could end up with more than her brother and have to try to come up with a way to equalize things without creating a gift. Sometimes that is possible via a family settlement agreement.

- If she shouldn't be the co-owner, how does she back out of it without ticking her dad off? That could be a challenge based on what I've heard about him.

Maybe have him do two accounts, one with her brother and one with her? Or he could fiix his will to provide for an equalization mechanism? Or forget about it and deal with it when he dies. It is her dad's money after all. When they equalize after death, look at the gift issue then and take it into account when equalizing.

Retire@40, are you around? Anything to add/dispute?

 

[lazygood4nothinbum]

-  If she shouldn't be the co-owner, how does she back out of it without ticking her dad off? That could be a challenge based on what I've heard about him.

if the brother has a good marriage and the account has just $100k (the $200k cd - $100k mailed check) after inheritance she can gift the couple $24k a year and even the score in 2.08 years or pay one year of college for her niece or nephew at $40k a pop with $10k going to the parents and be done with it even sooner, all tax free.

 

[Texas Proud]

OK, an OLD tax accountant.... (in more ways than one... but I have not done taxes in two decades....)

First, you need some legal advice... what does the 'or' do in the state your friend lives... from what I would think, it is co-ownership. Since she is not putting anything into the account, there MIGHT be some gift aspect involved with the money. This might also mean that the assets are not part of the estate and pass to the daughter when he dies, but a better designation on the account would be better. Also, just because you see 'or' on the mail does not mean that the account is actually structured that way on the account documents.

The interest appears to be taken care of by the dad... so no problem there.

I would suggest that the account should be in the fathers name with the daughter as a signator... I have my sister as someone who can sign my checks in case something happens to me, but it is MY account with only my SS# on the account.