CB asks, "My parents want to start putting my name on their bank accounts as they're getting older. I know this isn't the best decision. What should they do so I can manage their finances if they can't?"
Oh wow, okay, brunch. So, I've got aging parents, and this is like one of those "I have a friend" type of deals, a plan of questions that she could ask me. Because this is what we're doing, we walk around and strap people to our accounts. But let me tell you guys, if you want to get us fired up, this is one of those things that I see people do as their parents start getting older. They just start putting their kids on accounts, they put them on the deeds of houses, they put them on their bank accounts, and I'm telling you, do not do this. Stop. Do not pass go.
Because here's the problem you might be creating for yourself and your family. Your aging parents might be creating a gift tax trap. A lot of people don't realize, you know, you're only allowed to give $17,000 a year without reporting it. Once you go beyond that $17,000 to an individual, you're supposed to be filing a gift tax return, Form 709. Now, realize each person in the family, so if you have two spouses, they each get to do $17,000 to individuals.
But this is something that I see a lot of people run afoul of, and they don't realize they've done it. Because, you know, it's not uncommon that you've had an older person that's been collecting Social Security, has savings, so these accounts might be $40, $50, $60,000, and they just go strap their child on there. You just created a gift tax problem.
There's a better way. And what I've found is banks have modernized. You can do payable on death if you don't want to run through your estate documents. If you live in a state that has high probate costs, you can go to your bank and just add a payable on death. And if you want to have access, there's nothing wrong with seeing if your bank account can actually grant access to your account through a power of attorney. You could do a revocable trust. A lot of states that do have probate issues, you can set up a revocable trust, and then you can set up your children or whoever is going to be helping you out with that part. There are so many options, but do not do what you think is the simple solution but creates great complications for your family.
Yeah, I'll tell you one thing that really breaks my heart when I see this. Not only do you run into the gift tax consequences, but one of the things that might happen when you start just adding children onto real estate deeds or onto investment accounts, you may be taking away one of the most valuable tax planning strategies that exist.
Do you realize that when you pass away and when you leave assets to a child, that child gets what's called a step-up in basis on those assets? So if you bought a house for $100,000 and now it's worth a million, because there are people in California who bought houses for $60,000 to $100,000, now they're worth well over maybe even two million. And if they did this, it would be a disaster, that's right, because what happens is when you pass away, on the day of death, the basis, the amount that the government considered that was paid for that house, gets stepped up to fair market value. So, in this situation, if your parents bought a $50,000 house and it's now worth a million and you inherit that million-dollar house, all of that capital gain goes away, it essentially evaporates.
Well, this is true for real estate purchases, and it's also true for brokerage accounts. So, if your parents think they're doing a good thing by putting you on their accounts, what they're actually doing is making a gift where their basis carries over to you instead of letting you inherit this. So, one of the best ways you can protect against this is just simply education. Understand, okay, Mom, Dad, what is it you're trying to accomplish? Okay, great, if you want me to be able to help you with your accounts and you want me to be able to help make decisions, I can have a power of attorney, and I can help make those decisions. I can help do those sorts of things. But we don't necessarily want it to be in my name because if it's in my name, there's a good chance we could lose some very real tax benefits when we do that.
Remember how I said when you're successful, complication will track you down, and that's when you might need to take the relationship to the next level. This is a perfect gateway because this stuff gets intricate. You also have wishes, you have unique relationships, and it's nice to have somebody in there to help you navigate those tougher decisions. So, definitely consider fulfilling the abundance cycle, take the relationship to the next level. This is the type of stuff that a good financial planner can help out with. For more information, check out our free resources