Updated: Aug 1, 2019
By: Kevin Boland, CPA, Executive Vice President
Tis the season for summer weddings, which means a merging of vows, lives, and more often than not, bank accounts. Joint accounts can provide convenience to the owners, if they are set up and titled correctly. Business partners, close relatives, and other couples can enjoy the convenience of a shared account as well. When setting up an account with more than one owner, there are several items to consider. We recently had a walkin visitor looking for an explanation for why he was assessed inheritance tax on his checking account. Why? He wanted a friend to get his money when he died so he added her to his account as a joint account owner. Unfortunately, she passed away first and her "share" of his joint account was included in her estate and he was assessed inheritance tax on the amount. Depending on your financial goals and your particular situation, you must find the option that works best for you. If you spend the time up front considering your options, you may be able to find the account that works best for you.
If you are looking for an easy way to have shared access to funds, then a joint account is generally a good option. This is ideal for couples, business partners, and close relatives. Quite simply, this account is owned by two people, both of whom can make deposits and withdrawals to the account. Also, keep in mind that joint accounts only require one account holder to close the account. Right of survivorship is usually included on this account type, meaning when one co-owner dies, the other automatically becomes the sole owner of the account.
Even though the account itself would not be subject to probate, a portion of the account will contribute to the decedent’s taxable estate. Since assets that pass to a spouse are not taxed, that is not an issue for a married couple. Probate estates and taxable estates are two very different things. Probate assets are those that require some legal mechanism to pass to a living beneficiary after death, while joint accounts with rights of survivorship do not. Taxable assets include anything the decedent had an ownership interest in at the time of their death.
Another general means of releasing funds from an account, and to avoid probate, is to designate beneficiaries to a payable on death account, or transfer on death account. The beneficiary will only have to show the bank a death certificate to access the account.
Unfortunately, the death of a beneficiary before the account owner could potentially present a problem. Failing to determine the amount designated for more than one beneficiary, or if the only beneficiary predeceases the account owner without a new contingent or beneficiary listed, can result in the account going into probate and becoming part of the owner's estate.
Do not forget that with payable on death accounts there may be an inheritance tax. While the federal government does not impose an inheritance tax, the beneficiary is expected to pay the tax owed on the value of the POD account that transfers to them if the decedent held the account or died in Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, or Maryland. The inheritance tax rate is as much as 18% in Nebraska. For example, you could owe $18,000 if you inherit a $100,000 account. The good news is that the more closely related you are to the decedent, the less of a rate you may have to pay. Surviving spouses are typically exempt from this tax entirely, and some states exempt the children of the deceased as well. Beneficiaries who are not related to the decedent can expect to pay the highest rates. If you are in need of a financial advisor, give us a call! We are here to help with questions about your distinct situation.