I believe that people in this world have good intentions. When it comes to gifting assets, especially to one’s children, I have spoken with many well-intentioned families; however, they might not understand the whole situation. Perhaps they only have one piece of information from the puzzle or maybe they have no idea how that one piece applies to the law. As a general rule, we do not advise gifting assets to your children without guidance from a professional. This also applies to gifting a portion of the assets for joint ownership. While it may seem to be a good idea on the surface, there are a few reasons as to why we advise against it.
Clients frequently tell me that they would like to add their child as a joint owner on their accounts and assets for “convenience.” There are several reasons why this should not be done and why it will most likely end up being the most inconvenient thing you could do. The biggest reason clients seem to want to put their children as joint owners is to avoid inheritance tax so that, upon the parent’s death, the money will not become frozen and will automatically transfer to their child. Although technically true, most people do not realize this if the child were to die first, the parents would then have to pay inheritance tax on their own money.
In Pennsylvania, the inheritance tax to lineal descendants is 4.5%; thus, the parent would have to pay 4.5% on half of all the assets on which the parent and child are joint owners. It is not pleasant to have to explain to an already grieving parent that they will unfortunately now have to pay tax on their own money. The shock and dismay on the other end of the phone is palpable. Too many times, I have heard clients explain that they only added their child to the amount because the teller at the bank advised them to.
When a person dies, accounts in that person’s sole name are technically frozen; however, it only takes about a week to open an estate account, after which the executor can start paying bills. A week of a little inconvenience is certainly worth avoiding all the risks that are associated with having joint accounts with one’s children.
When a person ends up in long-term care and seeks to qualify for Medicaid to pay their bills, having a joint-owned account is often anything but convenient. A caseworker will look at who contributed the money to the account and oftentimes will then try to count 100% against the child who had access to it. There are so many issues with having a joint account with one’s child, it often does not pay off in the end to do it. Sometimes, it pays to be a little inconvenienced to avoid a catastrophe.
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-Jeffrey Bellomo
