Joint CDs - Who pays tax on intrest?

[GLM]

Tried google and searching this forum to no avail so I am asking with a new thread hoping some wise experienced poster has delt with this ...

My Parents who have been retired and are in their late 70's were told (by friends ) to add their children's names to CD's to avoid probate. While I understand this logic I am wondering what problems this may create. (Not worried about Kids taking the money)

They are telling me this after the fact and I am wondering if I should advise them to go back to the way they had it .

First issue is who pays tax on the interest earned ? (these are held in taxable accounts ) They have no tax liability while DH & I pay 34% on interest income - we do not need surprise phantom income totally altering our tax planning (Roth eligibility comes to mind )

Gifting and estate taxes are a moot point - parents live of of SS and Pension income - net worth is well under any estate tax level.

Ditto for avoiding Medicaid eligibility- not the intent so using funds for Long term care are expected if the need arises .

 

[eddieb]

Hey GLM,
Maybe I can provide some clarification. If i'm understanding right, your primary concern is who will pay taxes on the CDs because they are joint.

Assuming that this is your concern, then the primary individual (usually the first name on the account, statement, etc) pays the taxes. Even though they are joint accounts, interest from one account can only report to one social security number, which is the social of the individual that is listed first on the account.
It is also possible that if your parents have multiple CDs, then there may be different primaries depending on how the specific account is titled.

 

[OAG]

You can INSURE up to $900,000 in CD in a couple's name (at a single institution) like this (the IRA may not apply, but I will put it in here for completeness):

HIS name IRA up to $250,000; HER name IRA up to $250,000. His name IO (Individual ownership), up to $100,000 (and HE can name his spouse as beneficiary or the grandkids (either first or subsequent beneficiaries); Her name IO (Individual ownership), up to $100,000 (and SHE can name her spouse as beneficiary or the grandkids (either first or subsequent beneficiaries). Then they EACH can then have another $100,000 held by both of them JOINTLY in HER account and another $100,000 in HIS account these also can name grandkids as beneficiaries. This adds up to $900,000 at a single institution and the taxes are paid by Grandma and Grandpa (depending on whose name the account is in). Of course if they file a joint income tax return the taxes due, if any, would be on the joint return.

I am not sure naming the grandkids as primary beneficiaries will avoid probate in each and every state and under every circumstance - they really should check with an appropriate attorney. Also, depending on the amount of money involved, probate may be mute. However, they could hold the CD's in JOINT ownership with the grandkids with right of survivorship and then the money would pass without probate -- BUT the grandkids could cash the CD's with out Grandma or Grandpa's permission.

In any event, from what you said, they may want to get some legal direction as they may be creating more problems somewhere down the line. For instance if Grandpa owns a CD and puts Grandkid #1 on as primary beneficiary, and he dies, the money WILL legally belong to the child and not the surviving spouse, which maybe not be what he wants to have happen. However, from the information you gave, THEY (Grandma and/or Grandpa) are liable for the taxes -- the 1099's are issued in the owner's name.

 

[GLM]

Thank you for clarification on the tax issue !

That taxes are paid by the first SS# is what I suspected but was concerned that by being added to a CD I might incur a tax liability. My parents are aware of how to hold mulitple Cd's to keep them under the FDIC coverage. I went over that with them early last year as my father is handling the finances for a 95 year sister curently in a nursing home .

Good point on inheritance if the CD is held in only one parent's name and a child's. I will mention it to them next time we talk .They are not talking about doing the grandkid level - I think the thought of what some of the grandkids would do with the money (party!!!) negates this option.

 

[Goonie]

First issue is who pays tax on the interest earned ? (these are held in taxable accounts)

......the primary individual (usually the first name on the account, statement, etc) pays the taxes.

After my Dad passed away several years ago, my Mom put me on all of her CD's as joint owner with right of survivorship, and as eddieb stated, being primary she pays the taxes.

 

[LOL!]

A google of "nominee interest" tells you what to do: Nominee Interest