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Should Aging Parents and Children Co-Own Assets?

Taking care of aging parents can be unfamiliar territory. However, it is something many in their fifties and sixties are dealing with today. Part of the process is managing their finances, and one of the biggest hurdles can be gaining access to the accounts.

Many adult children suggest being a joint account owner, and in most cases, the intentions of this suggestion are pure and good. However, there could be unintended consequences that result from the child becoming a joint owner.

1. Tax Consequences of Joint Account Ownership

One of the biggest advantages of inheriting non-qualified assets is the beneficiary receives a step-up in basis at the death of the owner. If a child becomes a joint owner with one of their parents, the child will lose some of the tax benefits of the step-up in cost basis. For example, let’s assume a parent purchased 1,000 shares of X stock in 1980 for $1.00 per share. However, on the date of that parent's death, the stock was valued at $60.00 per share. Had that parent sold the stock while living, they would have been responsible for capital gains tax on the appreciation of the stock above the original cost basis, meaning a gain of $59,000 (1,000 shares x $59/share) would trigger $8,850 in long-term capital gains tax (assuming a 15% capital gains rate).

But, if the parent did not sell the stock while living, their beneficiaries would receive a new cost basis equal to the market value of the stock at the date of death ($60 per share). In other words, if the children inherited the stock and sold it right away, there could be little to no tax consequence. That is the benefit of the step-up in cost basis. 

If a child becomes a joint owner with a parent, the child will share the original cost basis as a result of the carry over rule, which states the original owner’s cost basis will carry over to the joint owner. Therefore, the step-up in basis would only occur on half of the assets, as the other half is considered already owned by the child (or joint account owner).

If the parent has an investment with a large amount of capital gains, or maybe a home with a very low cost basis, it may be better if the child avoids becoming a joint owner on those assets. (For related reading, see: What Determines Your Cost Basis?)

2. Parent’s Assets Could Now Be Subject to the Child’s Creditors

One thing most aging parents don’t realize is by naming a child as a joint owner, the parent’s assets can become vulnerable to the creditors of the child. While this may not be a problem for some, it can certainly be a major problem if the child has outstanding debt or a history of financial problems. In these cases, the parent still thinks of the joint account as his or hers, but, when the child is named as a joint owner, it is no longer solely owned by the parent. So, with all of the benefits of joint ownership come all of the consequences as well.

3. Other Heirs May Unintentionally Be Disinherited

Another consequence of joint ownership is what happens to the assets after the parent becomes deceased. When the first owner of a jointly-owned asset becomes deceased, the account or asset will transfer directly to the other joint owner. In the case of the parent becoming passing away first, the account or asset would transfer directly to the child who shares ownership, even if that parent had other children and intended to pass his/her assets equally to additional beneficiaries according to a will. As a joint owner, the designated child would have full legal rights to the asset. This could cause a problem if there is any tension among the siblings and presents the opportunity for one sibling to disinherit another. (For related reading, see: Avoiding 4 Common Causes of Family Estate Fights.)

4. Other Ways to Access Accounts

The strategy of adding a joint owner is sometimes used because people don't know of any alternatives. However, there are a couple of ways to provide a child with access to a parent’s account without causing the negative side effects listed above. First, a parent could grant a child power of attorney (POA) for all financial matters. This authority would allow the child to direct funds on behalf of the parent, sign checks and maintain all financial assets. A POA can be drafted by an attorney to designate if the parent wants to grant access on all financial assets or only on specific ones.

Also, many bank accounts allow for account owners to provide someone with signing authority, sometimes known as a signatory. This allows a third party to sign checks, make withdrawals and possibly even monitor account activity.

Both of these strategies provide access to financial assets without changing the ownership or beneficiary structure. This is often the best-case scenario from a tax perspective because it will still allow for a step-up in cost basis for all beneficiaries on non-qualified assets. (For more from this author, see: Don't Make Your Beneficiaries Search for Your Assets.)

From an estate planning perspective, these strategies allow for assets to pass to the next generation in the way they were intended by the parents, which may be by beneficiary designations, a will or a trust.

When Joint Ownership May Make Sense

While it is important to consider the negatives to joint ownership between an aging parent and adult child, there are certainly cases where it might make sense. For example, for low-interest-bearing accounts with minimal capital gains, joint ownership could be an easy way to give a child access to the parent’s financial accounts. However, it’s hard to argue against the safest approach being to simply grant power of attorney or signing authority to the child to avoid any unforeseen complications.

(For more from this author, see: Avoid These Portfolio Diversification Mistakes.)


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