I hear this question all too often.  A client will come in, thinking they have a great solution, and propose, “Should I put my bank and brokerage accounts in joint name with one or all of my children?” In almost all cases the answer is an emphatic “No!”

First and foremost, when you title an account in joint name with someone else you are actually making a gift of half of its value. So if Ethel puts her brokerage account worth $1 million into joint name with her daughter Francoise, she just made a gift of $500,000 to Francoise (half of the value of the account).  Because the most anyone can gift tax free is only $15,000, titling an account worth more than $30,000 would require the filing of a federal gift tax return. In my example, Ethel would have to file a return that would either reduce her gift and estate tax exemption, or if she’s already used up her exemption she may actually have to pay gift tax.

Second, if Ethel’s daughter Francoise is experiencing any legal or financial problems, Ethel may have put her account at risk. If Francoise is going through a divorce, for example, a forensic accountant may discover the asset and it might be at jeopardy depending upon circumstances. The same holds true if Francoise has creditor or bankruptcy problems.

Third, titling the account jointly will likely thwart Ethel’s estate plan. Assume that Ethel has a will that says that upon Ethel’s death all of her assets are to be divided equally between her three children.  If the account is titled jointly with rights of survivorship with Francoise, Francoise would inherit the account outright despite Ethel’s contrary intention in her will. Even if the account is held jointly as tenants in common, Francoise owns half of it and the other half would be distributed in thirds according to Ethel’s will.

Francoise might be altruistic and wish to share the account equally with her siblings. But she might have a gift tax problem herself. If she tries to divide the account that she legally owns, she is making a gift in excess of the $15,000 annual gifts that she can give tax-free.

Fourth, accounts owned jointly do not enjoy the full “step-up” in tax cost basis that would otherwise occur. Assume that Ethel owns 1000 shares of ABC Company Stock that is worth $100 share but she paid $10/share many years ago. If Ethel sold all of her shares she would recognize a $90,000 capital gain. But if Ethel dies still owning the shares, her children inherit them at the date of death value for tax cost basis purposes. So if her beneficiaries sold the shares shortly after her death for the $100,000 there would not be any capital gain and therefore no capital gain tax to pay.

But if Ethel places the account in joint name with Francoise during Ethel’s lifetime, on Ethel’s death Francoise only gets a one-half tax cost step up. In this case, Francoise would recognize a $45,000 capital gain if she sold the shares for $100,000. ($100,000 sales price less $5,000 basis in half the shares and $50,000 basis in the other half of the shares).

Hopefully you are convinced that placing assets in joint name with children isn’t a good idea. So what should you do if you want your child to be able to transact business on your accounts – particularly if you become disabled and unable to manage your own affairs?

This is where revocable living trusts really shine. Ethel can create a revocable living trust and name herself as her initial trustee but also name Francoise as her successor trustee in the event of a disability. Francoise can then transact business on all of Ethel’s accounts that the trust owns. It is not a gift to Francoise since she is acting as a fiduciary for her mother. On Ethel’s death the trust avoids probate and rightfully distributes the accounts to all of Ethel’s children (if that is her wish).

Another alternative is a durable power of attorney. Ethel can sign a durable power of attorney that would name Francoise as her attorney-in-fact to transact business on all of Ethel’s accounts. You should know that the Florida law governing durable powers of attorney changed significantly back in 2011. If you have a durable power of attorney created before that date, you should consult with your estate-planning attorney to determine if yours needs updating.

The bottom line is that you shouldn’t put accounts and assets in joint name with your adult children. There are reasonable alternatives that don’t carry all of the disadvantages associated with joint accounts.

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