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Simple Estate Planning Through Bank Accounts – Part 1

If you want to do some simple and inexpensive estate planning to reduce Pennsylvania state inheritance taxes, you may not have to look any further than how you title your bank accounts. With the exception of life insurance, out-of-state real property, some pension/retirement benefits, and spouse-to-spouse transfers on death, assets owned at the time of death are subject to Pennsylvania Transfer Inheritance Taxes. The tax rate for assets passing to “lineal descendants” – grandparents, parents, children, grandchildren – is 4-1/2%; to brothers and sisters – 12%; the rate for all other non-charitable “collateral” beneficiaries – i.e., aunts, uncles, friends – is 15%. The tax is imposed on the NET value of your assets (date of death value less certain allowable expenses).

Holding an asset in joint (2 or more) names for more than 1 year before death reduces the portion of the value subject to tax. A bank account titled to a parent and/or a child is taxed on only one-half of the balance instead of the entire value. Aging parents often add a child’s name to an account for convenience. The account is usually maintained under the original depositor’s social security number. The account can be titled via “or” ownership – either party can make withdrawals – or via the less common “and” ownership – where both parties must sign for withdrawals. Either way, a $10,000 joint account held more than 1 year before death by two owners is subject to tax on only $5,000, yielding tax due at 4-1/2% of $225. The tax on a solely held account would be $450 – 4-1/2% of $10,000. The same $10,000 joint account titled to an aunt and a niece results in tax of $750 (15% on $5,000), while a solely held $10,000 account passing from aunt to a niece yields a tax debt of $1,500.

Another benefit of a joint account is that on an owner’s death, the account passes automatically to the co-owner – no estate administration is required for the co-owner to get the money. The co-owner only has to give the bank proof of identity and a death certificate to receive the funds. This is identical to what a more expensive living trust would do.

While this seems like the perfect estate planning tool to cut your taxes, there are pitfalls to be considered before you change your accounts. Suppose a parent has a $10,000 account and adds her son’s name as co-owner. If the son dies, the parent has to pay tax on her own money. Even though the son didn’t contribute to the account, the tax laws presume the deceased account holder owned one-half of the balance. A larger part of the account is taxed if it was made joint within 1 year of the co-owner’s death.

The scarier scenario is what happens if a joint account holder of an “or” account take the account proceeds, leaving the person who contributed to the account penniless. Another fear is what if the non-contributing co-owner ends up in divorce court – the person who put the money in the account has to worry about the co-owner’s spouse making a claim to the assets! I think these fears make many depositors reluctant to relinquish ownership and control of their accounts. Sometimes it’s better to have peace of mind and security and leave your heirs to pay a little more tax.

The fear of losing an asset is a prime reason people don’t utilize joint accounts as an estate planning tool. Often, people use “in trust for” accounts instead. Under an “in trust for” account, the depositor remains the sole owner of the account. The account title is changed to read that it is owned by “John Jones in trust for Betsy Smith.” The account stays under the depositor’s social security number for income tax purposes, and the depositor retains sole control over the asset. The beneficiary has no access to the money until the depositor dies. This helps avoid the estate administration process for the account and preserves the money for the depositor. The account is subject to tax on the full account balance but only on the depositor’s death.

Another way of handling your accounts which has no impact on taxes but which can be convenient, is giving someone power of attorney over your account. Most banks facilitate this process by allowing you to fill out a card authorizing someone you trust to write checks or make withdrawals from your account. The person you authorize is your “Agent”, and that person also has to sign the card. The bank keeps it on file to show that this non-owner is entitled to total access to your account, including writing checks and making withdrawals. This is most commonly done with checking, savings or money market type accounts, and is generally done for convenience by ill or elderly depositors or people who travel a lot. The authority is limited only to the particular bank accounts for which cards are signed; it is not a durable general power of attorney to handle anything else. This power of attorney terminates on the depositor’s death, and the account doesn’t pass to anyone automatically on the depositor’s death.

Changing the title of your bank accounts, if done correctly, can save you taxes and probate fees. However, it can also give rise to other concerns. Therefore the objective of saving money has to be balanced against the pitfalls so you achieve your comfort level when dealing with your money.

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