Adding a Child’s Name to Parent’s Account – Part 3

In this third blog post of three, I continue discussing the pros and cons of adding a child as an additional owner of a parent’s account.  As I explained last week, if Mom adds one child as co-owner but has 3 children amongst whom she wants to split everything evenly when she dies, there is potential gift tax to be paid by the co-owner child in splitting the account with the other children.

One way to avoid this problem could be to add all the children as co-owners so when Mom dies there is no need to make any gifts to “even things out”.  All the remaining co-owners assume ownership of the account equally.  Gift tax issues are thereby avoided, however, there is another potential problem illustrated by a recent call to our office.

Mom had added her 2 children as co-owners on her account but one of them died before Mom.  The deceased child’s 1/3 share now passed by law to Mom and to the other child.  Why is this a problem?  Because New Jersey has an inheritance tax which is based on the relationship of each heir to the person who died.  Parents and children (of the deceased) are Class A heirs, exempt from the tax.  Siblings, however, are Class C heirs.  The first $25,000 is exempt but then there is a tax of anywhere from 11 to 15% depending on the amount received by the heir.

Mom explained that she did not intend to leave her assets to her children until after her death and she certainly did not want to pay tax to the State of New Jersey on what was her own money.  She was not happy with my explanation that under property law she had transferred part of the ownership to her children.  The account in question had a balance of $150,000 so the tax on the deceased child’s came to approximately $5,500. An inheritance tax return would need to be filed on behalf of the deceased child’s estate to obtain the tax waiver that would unfreeze the account.

Admittedly, the situation presented by our caller is not a common one, however, in trying to avoid the probate process a far costlier tax resulted.