Recently several new clients have arrived at my office explaining that they don’t need revocable trusts. “My banker told me simply to designate all of my accounts as “transfer on death” to my children, so no probate is necessary, and even no trust is necessary.” Other clients have placed bank and investment accounts in joint name with one or more of their children to accomplish the same thing.
Neither is a good idea.
Joint Accounts and Taxes
Let’s tackle the joint account with rights of survivorship first. The first is a gifting problem. When Mom places Daughter onto a joint account, then Mom is deemed to have made a taxable gift as to one-half of the value of the account. This would require the filing of a Federal Gift Tax Return Form 709 if the total gifts to daughter exceeds $15,000 in that year.
If Mom lives in a state that has a gift tax, a state gift tax filing may also be due.
In today’s world of high federal gift and estate tax exemptions, in Florida this isn’t necessarily fatal, unless at some point in the future those exemptions should decrease. In 2025, absent any further legislation from Congress signed by the President, the exemptions are slated to return to their former levels. So a large gift today might resonate in the future.
Further, when Daughter owns half of the account, she loses half of the step-up in tax cost basis at the time of Mother’s death. If Mother owned the account solely in her own revocable trust (that avoids probate anyway) then all of the capital gain would have been eliminated at Mother’s death. Daughter will pay additional capital gains taxes she otherwise wouldn’t have.
Even further, assume Daughter has two siblings that Mother wants her to share the account with. Legally, Daughter doesn’t have to. Even if Daughter is honest it is a taxable gift from Daughter to her siblings when she makes transfers to them following Mother’s death, resulting in the same problems discussed above but now they apply to Daughter.
If Daughter gets divorced or is a defendant in a lawsuit, or has bankruptcy or other creditor issues, those potential creditors can attack Mother’s bank and investment accounts that were put into joint name with Daughter.
None of these problems exist using a revocable trust.
Transfer on Death Accounts
Now let’s turn our attention to Transfer on Death accounts.
Assume Mother designates her investment account as “pay on death” to Daughter, but Mother also has Son. Daughter is expected to share with Son at Mother’s death. Nothing says that Daughter must, and if Daughter does share with Son, then she has the gift issue discussed above.
If one of the “pay on death” beneficiaries dies or has creditor issues, then another problem arises. Suppose Mother puts her investment account as “pay on death” to Daughter and Son. Mother becomes incompetent and then Son dies before Mother dies. Son is survived by a minor child, Grandson.
Mother wasn’t able to change the POD beneficiary, so when she died Son’s will would need to be probated. Son’s will left his assets to his wife, as opposed to grandson who Mother would have wanted the account to go to. Even if Mother was able to name Grandson directly, the bank could not make a transfer to a minor without an expensive and time-consuming court process. This all could have easily been avoided with a revocable trust.
In the Event of Incapacity
Let’s consider Mother’s incapacity as well. Because her accounts were not in a trust that authorized certain distributions, Mother’s attorneys weren’t able to assist the family with qualifying mother for Medicaid. Her nursing home expenses could deplete the account. Further, the bank wouldn’t accept the durable power of attorney because it was “out of date” which required the family to enter into an expensive and time-consuming guardianship to access the funds.
Mother was financially supporting Daughter prior to Mother becoming incompetent. Those payments had to stop because under a POD account there’s no way to legally continue those gifts.
POD accounts usually require that you designate equal shares for all POD beneficiaries. This may or may not comply with your intent.
Finally, if one of your beneficiaries is undergoing a divorce or other creditor problem at the time of your death, the POD account may become subject to claimants of that beneficiary.
This is just a laundry list of some, not all, of the potential problems with POD and joint with survivorship accounts. Anyone with any degree of wealth should instead use a revocable trust vehicle to navigate these issues.
© 2021 Craig R. Hersch for more information floridaestateplanning.com