Survivorship can be made thorny by Gift Tax

This column first appeared in the San Antonio Express News on August 15, 2016.

Dear Mr. Premack: I am joint owner on my uncle’s accounts and also executor of his Will. He did this so that I would have access to his money in order to distribute to others according to his Will. But, would that be considered me “gifting” the others and cause them to pay gift tax on amounts over $14,000? We were trying to avoid probate by doing this. Did we create another problem? Thank you in advance. – SM

There are a number of items that must be defined before your questions can be answered. You say that you are a joint owner of your uncle’s accounts. What do you mean by joint owner? There are options:

1. He may have gifted you a ½ interest in his accounts – which would have been done in a written agreement and would have potentially triggered a gift tax. He still owns the other half, and upon his death his half would pass under his probated Will with you acting as Executor.

2. He may have listed you as a co-signer on his accounts. This would give you access to the accounts while he is living, but would not give you any ownership of the accounts. When he dies, his account balances would pass under his probated Will with you acting as Executor.

3. He may have listed you as a co-signer and also granted to you a right of survivorship or named you as pay-on-death beneficiary. This would give you access but no ownership to the accounts while he is living, but upon his death would transfer ownership to you. This arrangement avoids probate but also contradicts his Will (which as you say, has instructions to distribute money to others).

Option #3 above is the only way to avoid probate under the situation you described. You picked up on the big problem with #3: You become the owner of the accounts when he dies, so when you divide the money the transfer is a gift from you, not an inheritance from your uncle.

Any gift to an individual in excess of $14,000 in a year subjects the giver to a gift tax. The tax issue lies on your shoulders, not on the shoulders of the other recipients. There is a second gift tax rule that allows you to give away more than $14,000 in a year if you a) report it to the IRS and b) use part of your lifetime gift tax exemption to eliminate paying any gift tax. The lifetime exemption is well over $5 million now, so unless your personal assets are very substantial, the only real hassle is filing the proper returns with the IRS.

On the other hand, there is a way to avoid probate and to avoid the IRS complications. If your uncle a) establishes a proper Revocable Living Trust (he should only work with an experienced trust attorney, not an insurance agent or trust mill), b) transfers his accounts to the Trust, c) names you as Trustee or on-death Successor Trustee, then when he dies you can transfer his money to all the proper individuals without probate and without gift tax. The Trust legally avoids probate because it owns the accounts and it cannot die. Gift tax is avoided because the money is transferred directly from the Trust to the beneficiaries as an inheritance, not as a gift.

Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues viawww.TexasEstateandProbate.com or www.Premack.com.

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