Should I be a joint tenant on accounts with my aging parent?

Adding yourself as a joint tenant on your aging parent’s accounts might seem like a simple solution to manage their finances. It offers some advantages, such as easy access to funds for bill payments, simplified asset transfer upon death, and convenience for day-to-day financial management. However, there can be drawbacks and unintended consequences to consider.

Potential Negatives of Joint Tenancy

1. Gift Tax Implications: Adding yourself as a joint tenant can be considered a completed gift, potentially carrying gift tax implications if reported correctly. Although the intent is often to facilitate daily access, it is technically a gift.

2. Liability for Debts: As a joint tenant, you are equally liable for any debts or liabilities associated with the account. Creditors can target the account for either party’s debts. Moreover, joint accounts might be viewed as available resources when applying for Medicaid, potentially affecting eligibility.

3. Impact on Cost Basis: Joint tenancy can affect the step-up in cost basis for a home and/or stocks when your parent passes away. Normally, assets receive a step-up in cost basis to their value at the time of the owner’s death. For example, a stock bought for $10,000 that is worth $50,000 at the time of the parent’s death would have its cost basis adjusted to $50,000, eliminating the $40,000 unrealized gain. If the account is jointly held, only half the value gets stepped up, leaving you with an unrealized gain on the portion you own.

4. Risk of Unintentional Disinheritance: A joint tenancy with the right of survivorship means the surviving tenant inherits the entire account, regardless of the estate plan or intended wishes. This could disinherit other heirs unintentionally. Even if the surviving tenant wants to honor the family’s wishes and distribute the assets, it is considered a gift, which could trigger gift tax implications and retain the unstepped-up cost basis/unrealized gain.

Alternative Solutions

Given the potential complications, I recommend handling your finances differently with a clearer structure, especially if multiple heirs are involved.

1. Financial Power of Attorney: Establishing a financial power of attorney allows you to manage your parent’s finances while they are alive without the complexities of joint tenancy.

2. Payable on Death (POD) Designation: A POD designation names a beneficiary who will receive the account’s assets upon the parent’s death, bypassing the will and allowing immediate access for the beneficiaries.

3. Establishing a Trust: A trust can also bypass the will, offering clear distribution parameters and immediate access for beneficiaries. It keeps the step-up in basis intact and avoids gift tax issues.

By using a combination of these options, you can help your parent manage their finances effectively while avoiding the pitfalls of joint tenancy.

Have questions? Feel free to contact us.