Cautionary Tales - When Joint Ownership Backfires - Episode 208

Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is the “cautionary tales” topic. And on these “cautionary tales” episodes of Legal Tea, we normally talk about real-life cases with real-life clients that are things me or my office have worked on -or they are things that I think are generally good things to be aware of, so you don’t turn into a cautionary tale on my Legal Tea podcast one day! So today I want to chat about something that comes up constantly in my estate and elder law practice – and that’s this: people asking whether they should add someone (usually an adult child or adult children) to their bank account, house, or whatever-asset. And here's the thing - I almost always say do not do it. Like, seriously, I'm sitting here trying to think of a time when I've said "yeah, go for it" and I'm coming up blank.

Look, I get it. People have good intentions when they do this. They're not trying to create drama or mess things up for their family. But here's the problem - they usually don't realize what can go wrong. And trust me, plenty can go wrong. Since this is a “cautionary tale” type of episode, let me tell you about a real-life situation that happened with one of our clients. It is a perfect example of why this whole "just add them to the account" thing is usually a terrible idea...

When someone passes away, the way the office handles that type of call is that we try to tackle two things right off the bat. First, we try to answer any of those super-burning questions that families usually have right after someone dies. Second, we will try to guide them on figuring out what paperwork and documents they still need to track down to make a meeting with us super productive. That way, when the family meets with our office, we can dive right into the real work instead of spending the whole time figuring out basics. So anyway, this daughter calls our office because her dad just passed away. I happened to be walking by who took that phone call and she said, "Oh boy, do I have a story for you!" So here’s what happened…

Before the dad died, he added his daughter to his savings account. It was not just an account with a few thousand bucks in it; rather, the account had about $400,000 - not pocket change, right? Now, here's the thing about joint ownership that people don't always understand: when one person dies, the other person automatically becomes the sole owner of the asset. There are a few exceptions with some types of assets – like real estate and businesses, but financial accounts, that’s usually always the case. So this daughter? She now owns all $400,000. Her five siblings? They get nothing from that account. And here's the kicker - she technically doesn't have to share it with them. Not legally, anyway.

But wait, it gets better. This daughter tells my office, "I know my dad did NOT mean for me to keep all of this. His Will says everything should be split six ways between me and my siblings. So I'm going to give each of them their share." Now, you may be thinking, “That's really nice of her!” Because honestly, I've seen plenty of people in similar situations who would absolutely keep that money and tell their siblings tough luck. And before you say "oh, my family would never do that" – just stop right there. I've been doing this for nearly fifteen years. I've seen families you'd never expect turn nasty over money. It happens more than you'd think.

As if this was not already pretty messy, we have this daughter here and she wants to do the right thing, but here’s another kicker – taking that money and sending parts of it to her siblings. That’s considered a gift, so “gift tax issues” enter the chat.  But before we go too much deeper – Let me break down gift taxes for you because they're probably the most misunderstood thing in all of tax law. Every person gets two exemptions - an annual one and a lifetime one. Right now, you can give $19,000 per year, per person without any paperwork. That's the annual exemption. But here's what most people don't know - you also get a lifetime exemption of $13.99 million. That’s the current amount; it will go up to $15 million at the turn of this year.

Here's how it works. Say I give you $25,000 today. That's $6,000 over my annual limit of $19,000, right? So I have to file a gift tax return telling the IRS about that extra $6,000. But - and this is the part people miss - I don't have to pay taxes on it. Instead, it just chips away at my lifetime exemption. So now instead of having $13.99 million in lifetime exemption, I have $13.99 million minus $6,000 left. I hope that makes sense! So back to our daughter. She's got $400,000 to split six ways, so each sibling should get about $66,666. She's going to have to make five gifts of $66,666 each. That means she's giving $47,666 over her annual exemption to each sibling.

What does that mean? She now she has to file five gift tax returns (which is annoying and will probably cost her money to have an accountant do), and she's using up about $238,000ish of her lifetime exemption. That might not sound like a big deal when the exemption is close to $15 Million, but here's the thing - these exemption amounts might change. Just like these amounts have continued to increase in the past, they could get lowered by a change in guard with the President and Congress.

As an estate attorney, the really frustrating part is that the dad could have accomplished the exact same thing without putting his daughter through this mess. And he had two ways to do it that would have been so much cleaner for everyone involved, which we will get to in a minute. But think about what proper planning would have achieved. Nobody would have had to make that awful decision about whether to share the money or keep it all. I mean, can you imagine the position this put the daughter in? She's grieving her father's death, and now she's got to wrestle with her conscience about whether to give away money that legally belongs entirely to her. And honestly, what if she had been a different kind of person? What if she had kept it all? The family would have been torn apart, and there would have been absolutely nothing the siblings could have done about it legally. And even beyond that, proper planning would have meant no gift tax returns to file, no eating into anyone's lifetime exemption, and much better tax treatment overall.

So like I mentioned a minute ago, the dad really had two solid options here. The first approach - cheaper upfront but more expensive on the back end - would have been to simply leave the account in his name and have a proper Last Will and Testament drafted. The Will would have clearly stated how his assets, including the $400,000 savings account, should be divided among all six children, and everyone would have gotten their fair share automatically. No family drama, no difficult decisions, no tax headaches. The downside is that the Will would have had to go through a court process called probate, which means court involvement and fees that can really add up, depending on your state and the complexity of the process.

The second approach – which is more expensive upfront but cheaper in the long run - would have been to create a Living Trust and transfer his assets, including the savings account, into the trust's name. The trust document would spell out exactly how everything gets divided when he passes away, just like a Will could, but without the probate process. No court involvement, usually less fees after death, and still no tax issues or family drama. While creating a Trust typically costs more initially than drafting a Will, it typically saves families thousands of dollars and months of hassle in the long run.

So what’s the bottom line here? Well, the whole situation really drives home some important lessons that I see people miss all the time. First off, what seems like the "easy" solution often creates the biggest problems. Adding someone to an account feels simple and straightforward - no lawyers, no fancy documents, just a quick trip to the bank. But as this family learned the hard way, that simple solution can explode into a complicated mess that affects everyone involved.

Another huge takeaway here is that good intentions don't protect you from bad consequences. This dad clearly loved all his children and wanted them to be taken care of equally. He probably thought he was being smart by putting his daughter on the account - maybe he was worried about her being able to access funds quickly after his death, or maybe he thought it would help avoid probate. But good intentions without proper planning can actually make things worse for the people you're trying to help.

The timing issue is also important to consider here. Tax laws change, and they change more often than people realize. (Like, I am recording this in mid-July shortly after the One Big Beautiful Bill’s passing, which has A LOT of tax changes in it.) What might seem like a minor issue today - like using up some of your lifetime gift exemption - could become a major problem tomorrow if the exemption amounts get slashed. This daughter could get stuck with the consequences of decisions made when the law was different, and she'll have to live with whatever changes come down the road.

Look, I know adding someone to an account seems like the simple solution. It feels like you're just making things easier for everyone. But as you can see from this story, it can create way more problems than it solves. The daughter in this case is lucky - she's honest and wants to do right by her siblings. But she shouldn't have to use up her own tax exemptions and deal with all this paperwork because of her dad's planning mistake. And honestly? Not every family is this lucky. I've seen too many cases where someone keeps the money and the family ends up in court fighting about it. The moral of the story? Before you add anyone to any asset, talk to a lawyer. Yeah, it might cost you some money upfront, but it'll save your family a lot of headaches and potentially a lot of money down the road.

Alrighty, let’s shift to a sneak peak of next week, which we’re circling back to the “current trends” topic where we talk about things that are going on currently that impact my estate and elder law world – or maybe, things that I have stumbled upon on the news or social media that is relevant to this podcast. Next week is going to be kind of a follow-up episode…so way, way back in episode 35, I did a “celebrity estate planning” episode on Tony Hsieh; Well, there are updates to his estate, including a Will that has suddenly appeared. Yes, you heard me right. Suddenly appeared. So, since there are headlines going on about this, it seems like a good time to do an “update” episode on Tony’s estate. So, that’s what next week will be about, Legal Tea Listeners, so until then, be well and talk soon!

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