Q&A: Should Aging Parents & Adult Children Co-Own Assets?
Taking care of aging parents can be unfamiliar territory for anyone who is put to the task. However, it is something that many in their 50s and 60s are dealing with today. And, part of navigating that unfamiliar territory is trying to find a way to more easily manage “Mom or Dad’s” financial accounts.
The biggest hurdle in helping Mom or Dad with their money is gaining access and authority on their financial accounts. Therefore, many adult children will speak with their aging parent about becoming a joint account owner. In most cases, the intentions of this suggestion are pure and good. However, there could be unintended consequences that arise as a result of the child becoming a joint owner.
Here are a couple of things to consider both for the aging parent and the adult child:
1. Tax consequences:
One of the biggest advantages of inheriting non-qualified assets is that the beneficiary receives what is called a “step-up in basis” at the death of the owner. If a child becomes a joint owner with mom or dad, the child will lose some of the tax benefits of the step-up in cost basis.
For example, let’s assume mom or dad purchased 1,000 shares of ABC stock in 1980 for $1.00/share. However, on the date of mom or dad’s death, that stock was valued at $60.00/share. Had mom or dad 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. That would mean that there would be a gain of $59,000 (1,000 shares x $59/share), which would trigger $8,850 in long-term capital gains if you assume a 15% capital gains rate.
But, if mom or dad 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/share). In other words, if the children inherit the stock and sold it right away, there could be little to no tax consequences. That is the benefit of the step-up in cost basis
If a child becomes a joint owner with a parent, then the child will share the original cost basis as a result of the “carryover basis” rule, which states that the original owner’s cost basis will “carryover” 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 that has a large amount of capital gains, or maybe a home that has a very low cost basis, it would certainly suggest that the child should avoid becoming a joint owner on those types of assets.
2. Parent’s assets could now be subject to the child’s creditors
One thing most aging parents don’t realize is that 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 deceased first, the account or asset would transfer directly to the child that shares ownership, even if that parent had other children, a will, and intended to pass his/her assets equally to additionally named beneficiaries. 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.
4. You can gain access to your parents’ accounts using other methods
The strategy of adding a joint owner is sometimes used because people may not 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 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 Power of Attorney can be drafted by an attorney to designate if the parent wants to grant access on all financial assets or only on specific assets.
Also, many bank accounts allow for account owners to provide someone with signing authority, sometimes known as a signatory. This allows a 3rd party to sign checks, make withdrawals, and possibly even monitor account activity.
Both of these strategies provide access and authority 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. 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.
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 that have minimal capital gains, joint ownership could be an easy solution 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.