Inheritance question (tax related)

[Infovore]

Not sure if this is a GQ or an IMHO, so I’ll put it here and the mods can move it if needed. Also, I’m not asking for legal advice, just some ideas of what I might expect, or thoughts from anyone with similar experiences.

My dad passed away last month, and I’m going to be meeting with a lawyer to discuss his estate later this month (it’s not substantial, but there’s likely to be a decent amount of money involved). One thing I was wondering about ahead of time, though: my dad had two bank accounts, a savings and a money market, each with about the same amount in them (again, not huge but there’s a reasonable amount of money between them). Quite some time before he died, he added me as a second named accountholder (we had to go through having me sign a card and return it to the bank to do this).

After he passed away, I went to the bank to report his death and get set up online so I could use the account to pay Dad’s bills (for example, keep up the payment on his motorhome until we’re allowed to sell it). His name has now been taken off the account, so it’s solely in my name. When I spoke to the lawyer to set up the meeting later in the month, he told me that since I was on the account, this money is mine free and clear and won’t be part of the total when calculating his fees for doing the probate.

So my question is: what are the tax implications of this? Would it fall under inheritance tax? Between the two accounts they’re more than $10,000–isn’t that the threshold over which you have to pay taxes on a gift? Is it a gift?

I don’t plan to touch the money at all except to pay Dad’s bills with it until everything’s settled and I talk to the lawyer, but I also want to make sure I’m not in for a nasty surprise come tax time (and if am, to make sure to put aside enough money to cover it.)

Any thoughts? I’m in California, if it matters. My mother predeceased him, there are no other siblings, and I’m the only one named in the will. I’m both the sole heir and the executor, so there’s virtually no chance of anyone challenging the will. After I read the will to him, the lawyer told me that probate will be annoying and time consuming, but that it’s just a matter of waiting out the time it takes for the court wheels to churn.

Thanks!

[AuntiePam]

@Infovore

So my question is: what are the tax implications of this? Would it fall under inheritance tax? Between the two accounts they’re more than $10,000–isn’t that the threshold over which you have to pay taxes on a gift? Is it a gift?

You held the account jointly with your dad, so the money in that account is not a gift, so no gift tax. (My brother was a joint holder with my mom, and there was no gift tax.)

The TurboTax website says there is no federal inheritance tax and that only eight states have an inheritance tax and California isn’t one of them.

[RickG]

IANAL. That said, annual gift tax exclusion in the United States is around $14,000. Estate tax exclusion is several million dollars (too lazy to look it up). Unless there’s some additional estate tax in California, sounds like you’re probably just looking at the probate fees. There should certainly be no federal taxes on the estate.

You will have to file federal and state income tax forms for 2013, of course, which may result in tax bills, but those won’t be on the estate.

ETA: Or, what AuntiePam said.

[Ferret_Herder]

Dumb question, deleted.

[Infovore]

@Ferret_Herder

Dumb question: Is the OP also concerned about estate tax, or just inheritance tax?

The OP is kind of an idiot about this sort of thing, so I’m not even quite sure what the difference is between the two. Basically, I just want to know what the tax implications are for the money in my dad’s accounts.

So if it’s not considered a gift and it’s not an inheritance because I was on the account, will it just count as income, even though I’ve been on the account for a long time now (at least a year–I don’t remember exactly when Dad added me)?

For my 2013 taxes, will I have to report it now that it’s solely mine?

I know the lawyer will be able to tell me all of this stuff when I meet with him, but I’m just curious ahead of time.

[RickG]

@Infovore

The OP is kind of an idiot about this sort of thing, so I’m not even quite sure what the difference is between the two. Basically, I just want to know what the tax implications are for the money in my dad’s accounts.

So if it’s not considered a gift and it’s not an inheritance because I was on the account, will it just count as income, even though I’ve been on the account for a long time now (at least a year–I don’t remember exactly when Dad added me)?

For my 2013 taxes, will I have to report it now that it’s solely mine?

I know the lawyer will be able to tell me all of this stuff when I meet with him, but I’m just curious ahead of time.

If you were put on the account in 2013, and the amount was less than the gift tax exclusion (~$14,000) there’s no reporting requirement, and it’s not income. You would, conceivably, have to pay income tax on interest earned. And since the account was jointly owned, you may have to split the reported interest income over both tax returns (yours and his). Given the small amounts you’re talking about, and the very low interest rates on cash savings, I’d imagine that the interest income is quite small, though (<$50 would be my guess).

Even if the amount were greater than the gift tax exemption, there still likely wouldn’t be any tax, since the amount would just be deducted from the estate tax exclusion, which is in the millions of dollars.

Short answer: the recipient of a cash gift does not pay income tax on the gift. Either the giver pays gift tax, or deducts the amount from their lifetime estate tax exclusion.

[Quercus]

@AuntiePam

You held the account jointly with your dad, so the money in that account is not a gift, so no gift tax. (My brother was a joint holder with my mom, and there was no gift tax.)

I strongly doubt that this is correct. The IRS is generally not quite stupid enough to let people get around gift taxes merely by setting up a joint bank account.

Now, I would easily believe that the actual amount of money put into the joint account by your mother and then taken by your brother was small enough that gift taxes did not apply. But I really, really wouldn’t count on being able to claim that “it wasn’t a gift; I just deposited it into a joint account and then someone else withdrew it”

[Voyager]

If the OP is in California, I’d ask if there was a trust. Everyone and his brother in California has a trust if you have any reasonable amount of assets. That makes everything different, depending on whether the accounts were in the name of the trust or the father.

[RTFirefly]

@Infovore

One thing I was wondering about ahead of time, though: my dad had two bank accounts, a savings and a money market, each with about the same amount in them (again, not huge but there’s a reasonable amount of money between them). Quite some time before he died, he added me as a second named accountholder (we had to go through having me sign a card and return it to the bank to do this).

After he passed away, I went to the bank to report his death and get set up online so I could use the account to pay Dad’s bills (for example, keep up the payment on his motorhome until we’re allowed to sell it). His name has now been taken off the account, so it’s solely in my name. When I spoke to the lawyer to set up the meeting later in the month, he told me that since I was on the account, this money is mine free and clear and won’t be part of the total when calculating his fees for doing the probate.

So my question is: what are the tax implications of this? Would it fall under inheritance tax? Between the two accounts they’re more than $10,000–isn’t that the threshold over which you have to pay taxes on a gift? Is it a gift?

Way back in a distant lifetime, I was an estates and trusts paralegal. Some things have changed since then, but the basics haven’t.

1. Since the money in the account came from your Dad, it’s part of his estate for tax purposes. It’s not a gift. (Any money you withdrew from the account while he was alive would be a gift, but as RickG said, you’d have to get >$14K from him in a year to be taxable as a gift.)

2. If he died in 2013, the first $5,250,000 of his assets are exempt from the Federal estate tax (FET for short). So as long as his total worth was under that amount, you won’t have to pay a penny of Federal tax on it. (I see AuntiePam has already checked to see if there are California inheritance taxes.) I’m not sure whether you’ll have to file a Form 706 (the Federal estate tax form) just to demonstrate zero tax liability; the lawyer can give you the straight story on this.

3. Probate and the Federal estate tax go by very different sets of rules. Don’t fret if something’s part of the estate for tax purposes, but isn’t part of the estate for probate purposes. Assets held jointly, and insurance policies with named beneficiaries, are the two main things that pass outside of probate, but they’re part of the estate for Federal tax purposes. (Mind you, that only matters if an estate is big enough to warrant a Federal tax, i.e. >$5,250,000.)

[Infovore]

@Quercus

I strongly doubt that this is correct. The IRS is generally not quite stupid enough to let people get around gift taxes merely by setting up a joint bank account.

Now, I would easily believe that the actual amount of money put into the joint account by your mother and then taken by your brother was small enough that gift taxes did not apply. But I really, really wouldn’t count on being able to claim that “it wasn’t a gift; I just deposited it into a joint account and then someone else withdrew it”

Yeah, this is what I’m wondering about. I mean, in the greater scheme of things it’s not a huge pile of money, but it’s definitely big enough that I wouldn’t think the IRS would just be willing to ignore it. I’m hoping that RickG is correct that it’ll just be deducted from the estate tax exclusion.

[Really_Not_All_That_Bright]

@Quercus

I strongly doubt that this is correct. The IRS is generally not quite stupid enough to let people get around gift taxes merely by setting up a joint bank account.

Actually, it kind of is. The IRS hopes that people will be deterred from avoiding taxes by giving money to other people on the basis that you can’t really trust anyone with money - which is why as a general rule, people usually don’t just hand over all their stuff to other people no matter the tax benefits. As a named account holder, the OP could have withdrawn everything from the account at any time, fucking his dad, had he wanted to.

Having said all that, I strongly suspect the accounts would be subject to gift tax (if over the gift tax exclusion.)

[Infovore]

@RTFirefly

Way back in a distant lifetime, I was an estates and trusts paralegal. Some things have changed since then, but the basics haven’t.

1. Since the money in the account came from your Dad, it’s part of his estate for tax purposes. It’s not a gift. (Any money you withdrew from the account while he was alive would be a gift, but as RickG said, you’d have to get >$14K from him in a year to be taxable as a gift.)

I didn’t withdraw any while he was alive, because it wasn’t (in my mind) my account. He only put it in my name so in case anything happened to him, I’d have access. I didn’t even know how much was in it until shortly before he died, when he reminded me it existed.

2. If he died in 2013, the first $5,250,000 of his assets are exempt from the Federal estate tax (FET for short). So as long as his total worth was under that amount, you won’t have to pay a penny of Federal tax on it. (I see AuntiePam has already checked to see if there are California inheritance taxes.) I’m not sure whether you’ll have to file a Form 706 (the Federal estate tax form) just to demonstrate zero tax liability; the lawyer can give you the straight story on this.

Yeah, I plan to ask all these questions during the meeting. And there’s no way that the estate will be in any danger of taxes, if that’s the cutoff. The whole thing added together, even if everything sells for a more than anticipated, would only be a tiny percentage of that number.

3. Probate and the Federal estate tax go by very different sets of rules. Don’t fret if something’s part of the estate for tax purposes, but isn’t part of the estate for probate purposes. Assets held jointly, and insurance policies with named beneficiaries, are the two main things that pass outside of probate, but they’re part of the estate for Federal tax purposes. (Mind you, that only matters if an estate is big enough to warrant a Federal tax, i.e. >$5,250,000.)

Gotcha, thanks!

[Voyager]

Aren’t there restrictions to access to an estate’s assets after the death of the estate owner? When my father moved to California his initial estate plan was for me to take all the money out before anyone noticed. Happily, he and my mother took estate planning classes and set up a trust, and so everything was in good shape.

I don’t know if joint accounts are included in these restrictions. I believe safety deposit boxes are.

[Really_Not_All_That_Bright]

Yes, but the joint account isn’t an estate asset because it has an automatic right of survivorship.

[RTFirefly]

@Infovore

I didn’t withdraw any while he was alive, because it wasn’t (in my mind) my account. He only put it in my name so in case anything happened to him, I’d have access. I didn’t even know how much was in it until shortly before he died, when he reminded me it existed.

Yeah, I plan to ask all these questions during the meeting. And there’s no way that the estate will be in any danger of taxes, if that’s the cutoff. The whole thing added together, even if everything sells for a more than anticipated, would only be a tiny percentage of that number.

In that case, you won’t have a thing to worry about with respect to Federal estate tax or gift tax. Obviously, confirm this with the lawyer, since from your POV I’m just Some Guy Out There On The Internet, but you’re good.

Gotcha, thanks!

You’re welcome!