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  • Jenny Rozelle, Host of Legal Tea

Cautionary Tales - Joint Ownership Gone Wrong! - Episode 48



Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is a cautionary tale, where we talk about a real-life case with real-life clients with real facts. Though, of course, names are altered for confidentiality purposes. So, for today’s episode, we’re going to be talking about how many people make the decision to add someone to an asset – specifically, not a spouse. So, say, like a child to a bank account; a child on a house; etc.


You know, in my world, a lot of people will ask me – “Now, Jenny – should I just add so-and-so to my bank account or to my house for XYZ reason?” 99.9% of the time, my answer is “no.” I actually can’t really sit here and give an example of when that’s a good idea, which we’ll go over in detail during this episode WHY the answer is no – so we’ll get there, I promise. Oftentimes, people add someone to an asset for a pure reason – a good reason (it’s not like they are doing this to intentionally cause trouble!), but the thing about it is that they probably are not understanding all the potential consequences of that action. And that’s what we are going to go over today.


So, since this is a “cautionary tale” episode – let me give you what happened with the client/the family I’m referring to. In my law firm, if someone has passed away, the first step of our process is for a phone call to be scheduled with the paralegal that works on these types of cases – whether it’s probate, trust administration, etc. The point is that there is legal work that needs to be done after someone has passed away. In that phone call, the purpose of it is, sort of, two-fold:


1. We know there are some questions that if you have the answer to, it makes life a touch easier. So, the paralegal can help get some, if not all, of those immediate questions addressed.


2. After someone passes away, something we always get asked is, “What do you all even need from me?” So, on the phone call, the paralegal can help identify things that still need to be pulled (i.e. missing financial statement, maybe calling a financial company to see if there is a beneficiary designated, what documents to pull, etc.).


After the phone call, there is a meeting with the attorney that occurs – that way, because you have already talked to the paralegal about the immediate questions + gathered everything you need to pull, the first meeting can be super, super intentional and productive. Win for you, win for us!


So, in this situation, Dad had passed away and the daughter called the office to get the ball rolling on legal-stuff. My office, of course, got the call scheduled with the paralegal … and a few days later, the call occurred. I happen to cross paths with that paralegal and she said, “Oh do I have a Legal Tea podcast episode in the making for you!” So, she proceeds to tell me what she discovered in the phone call – that way, I can start stewing on HOW to navigate this upcoming meeting with the daughter.


Here's the scoop – Prior to Dad passing away, he added his daughter to a fairly sizeable savings account. I believe it had about $400,000 in it. You see – joint ownership is joint ownership. Technically speaking, the daughter is now the only and sole owner of that $400,000 because it defaulted to just her at her father’s passing. What does this mean? Well, technically speaking again, she doesn’t have to share it with her siblings. Is she required to? Absolutely not. Should she? Well, that’s up to her and her conscience, I suppose.


Here, in this case, she told the paralegal, “I know for a fact that me taking the entire $400,000 was NOT my father’s intention. I have five siblings and in his Will, he wanted everything split between me and my five siblings. So, my plan is to still split those funds equally between me and them.” Well, that’s awfully generous of her – because remember, she doesn’t have to. I’m sure we can all think of the type of people that would 100% keep those funds and say, “Sorry, sibs – I’m keeping it all!” (PS – A little news flash for some out there. I’ve been doing this for over ten years now. I can promise you the people that say, “Oh my kids/my family would never do anything like that.” Oh, some of those very people do. I see it happen. Trust me.


So, back to this cautionary tale, so beyond the fact that the daughter absolutely does not have to share, but she is going to – the stinky part of this is what for her action, she’s going to have to go through some annoying rigamarole to even share with her siblings. What do I mean by this? Gift taxes. Dun, dun, dun!


I really wanted to bring this story up today as a cautionary tale because I thought it would be an excellent time to talk about gift taxes. They are so, so misunderstood. So this is the scoop – I’ll give you the non-legalese, non-fancy way to describe how gift taxes work. Okay, so every person, in gift tax world, has an annual exemption amount and a lifetime exemption amount. As a baseline, we’re going to use 2022 numbers – because that’s when this episode is being released/recorded. So, the CURRENT annual gift tax exemption amount is $16,000/ per person, per year. The CURRENT lifetime gift tax exemption amount is $12.06 million dollars. This is how it works:


Say, I give you, Legal Tea Listener, $20,000 today. That is clearly more than my annual exemption amount, right? As the giver of the gift, I have to tell the IRS I gave $4,000 in excess of my $16,000 exemption amount (I gave $20,000 … the annual exemption amount is $16,000 … so I gave $4,000 more than that.) The “receiver” of the gift does not report, or anything. It’s always the GIVER of the gift. Anyway, to “tell” the IRS, that is a gift tax return. This is where people get SO confused – they think you’ll have to pay taxes on that $4,000 – no, not likely (at least for a majority of people) That is when the lifetime exemption amount comes to play. Anytime you exceed you annual exemption amount, you are chipping away at your lifetime exemption amount.


What does that mean? I chipped away $4,000 out of my $12.06 million dollar lifetime exemption. Well, BIGGGG deal! I often tell people – it is OKAY to give more than the annual exemption amount. People get so, so latched on to it and it’s because they don’t know the piece about the lifetime exemption. If you do give a gift that exceeds that year’s exemption amount, you have to report it to the IRS via a gift tax return – but so long as you have not eaten ALL of you $12.06 million dollar exemption away, it’s merely a reporting thing; not a paying of taxes thing. Does that make sense?


So back to this daughter, she said she had five siblings – so let’s do the math. There was $400,000 sitting in the account – that means, each sibling should get around $66,666. The daughter will have to do five gifts of $66,666 – meaning she’s going to have to 1) file gift tax returns stating she gave about $50,000 in excess of her annual exemption (which is just annoying for here) and 2) that $50,000 times 5 = $253,330 that she’s now chipped away at her lifetime exemption amount. That may not sound like a huge issue, but you probably think that because, like I said earlier, the lifetime exemption amount is $12.06 million dollars per person (close to $25 million dollars for a married couple). But what if they changed the gift tax lifetime exemption amount – which there are current proposals making that so. Even if the proposals don’t actually happen, the current exemptions amounts are supposed to sunset back to the original amounts (subject to inflation) in 2025/2026. So, the issue is … changes in the law.


So, this story is a cautionary tale because the Dad that passed away here could have 1) still gotten that $400,000 to all his children and 2) done so in a cleaner/nicer manner. Let’s talk about THAT!


There are two ways to tackle this – one is a cheaper-up-front/costly on the back-end method and the other method is a more expensive upfront/less costly on the back end. Let’s remind ourselves, too, that these options accomplish:


  • First, it accomplishes not putting *that* decision on one person on whether to share or not; as I said earlier, we probably all know people that would have taken the $400,000 account and ran (and not split it with the siblings);

  • Second, if that person DOES decide to share it, it accomplishes that person NOT having to file gift tax returns – not only is it somewhat annoying on that person, but they also are wise to use an Accountant to do so, which means an unnecessary expense to them;

  • Third, again if that person DOES decide to share it, it accomplishes that person not having to “eat” into their own personal gift lifetime exemption. Why should they have to eat into theirs due to poor planning on your part?!

  • And finally, if we do it the “right” way (which is what we’re going to talk about next), you’ll preserve your tax basis and your kids (so long as it remains the current tax law) will get a “step up” in basis meaning they won’t get hit with capital gains taxes. (Side note: We’ve talked about capital gains/step up in basis in past episodes – most recently in Episode 45 – Medicaid Myths, if you want to take a listen!)

Back to the options/methods – the first method (the one that is cheaper-up-front/costly on the back-end) is do leave this account in your name only and have a Last Will and Testament prepared. So long as the account remains in your name and at your passing, that account will be governed by your Will. Wills are cheaper to prepare than second method (which we’ll get to), but Wills have to be probated and taken through the Probate Court process – The probate process can get costly, which we’ve talked about a number of times on Legal Tea. The second method is to create a Living Trust (i.e. Revocable Living Trust or Asset Protection Trust) and state that anything in the Trust, at your passing, gets split how-you-want. While Trusts are more expensive to create than Wills, Trusts avoid probate so long as your assets are held in the name of the Trust. That means no (or very minimal fees) after you pass.


PS – Before we wrap up this episode, there are other ways to pass assets to beneficiaries (i.e. through beneficiary designations), but there are logistical challenges that those pose, but we don’t really have enough time to dive into that today. Check out Episode 36, if you have time.


Alrighty … let’s wrap up this episode. Next week, we are back to the current events/current trends topic -- something I’ve seen or run across that I think would be interesting on here. During that episode, we’re going to be talking about assisted reproduction and how my little estate/elder law world sometimes gets involves (maybe unintentionally!), so we’ll be diving into that next time, Legal Tea Listeners. Until then, be well and talk soon!


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