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Legal Disclaimer


Each time an investment or asset is purchase, the question is asked, "What name do you want on this?"  The answer to the question is most often given without much thought, planning or consideration of the legal and tax consequences that will result from the decision.  In this article, we will describe some of the legal and tax issues that result from the creation of a joint bank or investment account.

In General
Joint tenancy is a form of ownership where each owner has an ownership interest in the asset.  Any joint tenant may act with respect to the asset without the involvement of any other owner; that is, each owner can convey or transfer his or her interest during his or her lifetime.  Each person also has the right to possession, enjoyment and control of the entire asset.  This means each joint owner can withdraw the whole amount in a joint account.  It is the fact that each joint owner has the right to full control over a joint account that causes the most problems.  If one joint tenant has financial problems, his or her creditors can get all of the money in the joint account.  If one joint tenant wants to spend all of the money, he or she can.  It is this characteristic and disadvantage that has caused me to advise clients against establishing joint accounts with anyone other than their spouse in most instances.

Upon Death
We often refer to this form of ownership as "the last persons' club."  Upon the death of one joint tenant, the survivor(s) ordinarily become(s) the owner(s) without any probate proceeding (there are some exceptions to this which time and space do not allow to be addressed in this Article).  Upon the death of a joint owner of a bank or investment account, the remaining owners take ownership in proportion to their contributions to the account, along with an equal share of the deceased's portion.  When only one person is left, the joint tenancy ends and the surviving person (last person) becomes sole owner.

Income Tax 
For purposes of income tax, the surviving joint tenant generally gets a "step up" in the basis of the asset to the extent the value of the asset is included in the estate of the decedent.  (There are also some exceptions and qualifications to this general rule).  Although technically each joint owner is subject to his/her pro rata share of the income tax on any earnings of the joint account, from a practical standpoint, ordinarily one joint owner's social security number is used and all of the income is reported under that person's social security number.  Any qualifying expenses for the maintenance or establishment of the bank or investment account are deductible to the owner who pays them.

Gift Tax 
If one owner contributes more than the other into the bank or investment account, say, for example, one person puts all of the money in the account and the account is titled in more than one owner's name, there may be gift tax consequences.  The amount over the nonpaying owner(s) share is considered a gift.  This is generally not a problem if the parties are husband and wife since the gift will not qualify for the unlimited gift tax exemption.  Both spouses must be U.S. citizens to take advantage of this exception, however.

Estate Taxes 
On death, generally one-half of the value of a joint account owned by husband and wife will be included in the estate of the deceased spouse.  The amount in the account will pass to the other spouse without generating estate tax because of the unlimited marital deduction.  If the joint tenants are not husband and wife, the full value of the account is presumed to be included in the decedent's estate.  The amount includible in the estate is reduced, however, by the amount put into the account by other joint owners.

There are several advantages to this form of ownership, particularly if the joint tenants are husband and wife.  These advantages are most often overshadowed by the disadvantages that exist when the joint owners are other than husband and wife.  As with any planning option, however, it is always advisable to consult with an estate planning professional to see how you should title your bank or investment account.



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