MAKING CENTS: In case something happens to Mom

It’s when, not what if, something happens to mom

In the ordinary course of meeting with clients, we routinely see situations where elderly parents and adult children do things in case something happens to mom. In case? What’s that about? There is no in case; it is more about when and how something happens to mom and then what are the consequences of your moves in anticipation of the undesired but inevitable outcomes.

Among the more common “in case” moves are to have a child as a joint owner on financial accounts.

As a joint owner, there are several unintended consequences and possibilities that may occur. Either joint owner would have full access and control of the property and can do what they please with the money without consulting the other. Of course, we trust our children, but it may not be wise to leave your nest egg subject to the liabilities and vulnerabilities of another person.

The next consideration is gift taxes. When you add someone other than a spouse as a joint owner of an account, you have made a gift in the eyes of the taxing authorities. If that account is worth less than $14,000, there is no worry. This exemption is called the annual gift tax exclusion.

A further consideration is the ultimate disposition of the property. If we can assume that the elderly mom will pre-decease her joint owner in the account, the younger child will become the sole owner of the account. This is fine if that joint owner is your only child or intended beneficiary, otherwise it could become a disaster. As the new sole owner, your child is not required to fork over any part of that money to their brothers or sisters, regardless of what your will says. And if that child later finds that it is their moral obligation to split the assets with their siblings, it will create gift tax issues.

What could be even worse is changing title to the home to one or more of your children. This poses problems for several reasons. First, you do not own you home anymore and are a tenant of your children. As a tenant, the IRS requires that you pay a fair market rate of rent to the landlord or else they can impute rental income under audit. Imputed rental income means that they’ll require your children to report rental income showing the income and expenses of the rental property.

It is also safe to assume that mom’s home was worth more than $14,000 at the time of the gift, and therefore a gift tax return is required.

In general, mom has the best intentions of protection and legacy for the assets. But unfortunately, this is one area where mom would have been well served to hire a professional to plan this properly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.