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Hidden Traps with Joint Financial Accounts

Many of us enjoy the convenience of a joint bank account with a spouse, partner or an adult child. Some of us may even have more than one. While they do provide an undeniable solution to certain issues and inconveniences, they can pose a substantial problem when one of the joint owners passes away without the appropriate estate planning in place.

Death and Taxes

Traps for the unprepared could result in unnecessary liability for taxes. Taking over sole ownership of a joint account after the death of a loved one can typically be accomplished simply by presenting the deceased owner’s original death certificate to the bank or other financial institution. Yet doing so can result in tax (and other) consequences for the surviving account holder inheriting the account.

If the deceased account holder’s other assets are subject to probate, their portion of the income earned by the joint account before the transfer to sole ownership will be divided between the final income tax return for income earned prior to death and the estate income tax return for income earned after death.

Without an estate plan in place, the surviving joint account holder could face substantial estate and inheritance tax consequences due to “inheriting” the joint account. In most cases, the fair market value of the entire joint account will be included in the value of the deceased owner’s estate if the surviving joint account holder is not a surviving spouse (if the surviving joint account holder is a spouse, only 50% of the fair market value will be included in the estate). If the deceased account holder did not have an estate plan including a Last Will and Testament or Revocable Living Trust, the laws of the state where the account holder died or where property is located if referring to real estate, dictates whether or not the surviving joint account holder will be required to pay all or part of the estate/inheritance tax bill.

Solution

Neither death nor taxes are avoidable but the extent of the financial burden can be controlled with proper planning. With a thorough estate plan in place, the surviving joint account holder’s responsibility for the estate/inheritance tax bill is governed by the provisions within the Last Will or Living Trust.

Considering the potential consequences associated with taking sole ownership of a joint account due to the death of a loved one is just one of many reasons to consult an experienced and knowledgeable estate planning attorney. If you or your loved ones need help creating a will or trust to protect loved ones from undue stress and financial burden please get in touch with our firm.