Equalizing Mom/Dad’s Estate Distributions When Assets Pass Via Joint Accounts

I see this all the time:

Mom/Dad passes away (no surviving spouse) and their will leaves everything to their children equally…  Except for that money which passed automatically outside of probate to the child that lived near Mom/Dad and was helping them with basics of their daily lives – paying bills, taxes, etc., because they were the joint-owner on the account in order to help mom/dad with those daily activities.

What to do?

Oftentimes its a pretty simple matter that involves the joint-title holder with mom/dad gifting an amount of money to each of the other kids necessary to offset the joint-owners extra benefit…  However, one needs to ask the question: Is this advisable from a tax perspective?  What is this annual exclusion thing I hear about?

The Annual Exclusion:
In 2009, one can give $13,000 to anyone without encountering any potential gift tax liability…  That’s $13,000 per person, not in the aggregate.  So, if this is enough to offset the extra amount received by the one child, then great, inquiry over, gift away!  If not though, if more needs to be given to the other siblings than the annual exclusion allows, then gifting is still possible but you may have some gift tax liability.  So lets talk about that, what is the gift tax and when does it matter?

The Federal Gift Tax and The Federal Estate Tax Interplay:
Its not what you think…  Usually, you think of payinga tax; actually writing a check to the government.  Not so with the gift tax (most of the time).  If you give more than the annual exclusion amount to anyone in a given year, then the amount given that exceeds the annual exclusion reduces, dollar-for-dollar, the individual exclusion for federal estate taxes – $3.5 million in 2009.  As an example:  Lets say you give someone $14,000 in 2009.  The annual exclusion has been exceeded by $1,000.  If the person who made the gift then dies in 2009, their individual exemption for the Federal Estate Tax is $3,499,000.  That $1,000 over the annual exclusion reduced their individual exemption for the Federal Estate Tax by $1,000.  Therefore, it only really matters if your estate is near the exemption amount – otherwise, I’d say go ahead and make the equalizing gift to your siblings.

What if the sibling who was the joint-owner with mom/dad doesn’t want to equalize the amount received by the other siblings?  Well then tough, that sibling is a jackass, game over.  Absent some wrongdoing on that sibling’s part, calling them an ass at every successive family event is about all you can do.  Legally its their money.  There is no legal obligation to equalize the distributions coming from the estate.  Arguably there may be a moral obligation but you can’t usually sue on those.

Of course, the better way to deal with this is to not have to deal with it at all…  Call an experienced estate planning attorney to help you or your parents.  And don’t be shy about this stuff.  If your parents (or someone else you love) is getting up there in age, tell them to call someone.  Its about planning for these little earthquakes before they happen.  You’ll pay a little bit now to get it done, but you’ll pay 3-times more (on average) after your loved-one has passed and you and the estate attorney are forced to fix things.

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