Potential Gift Tax Consequences of Adding a Family Member's Name to Your Accounts

Seniors and others may find it convenient to add a family member or other person's name to their bank or other accounts to facilitate the management of their financial affairs. Withdrawals could be made to cover your medical expenses if you are sick or disabled and are unable to manage the account. Or the other person could draw on the account to cover the costs of a dependent's education, or other expenses. Another motive may be to establish joint tenancy with right of survivorship so that ownership of the account passes to the other person upon your death, without having to go through probate.

One of the considerations in adding another person to your accounts is the potential gift tax implication. According to the IRS, if you create a joint bank account for yourself and another person, and the other person draws on the account for his or her own benefit, you have made a gift to that person for the amount withdrawn. But as indicated by William G. Kistner in an article on BNET, in some states the law indicates that the joint account holder has a vested one-half interest in the account. So you could be considered to be making a gift when you contribute money to the account.

This would not apply in the case of your spouse, since transfers or gifts to a spouse are not subject to gift tax. It would apply in the case of your child or other family member. But you can give gifts of up to the exclusion amount, which is $13,000 per person, per year, without incurring any gift tax. And, tuition or medical expenses that are paid directly to a medical or educational institution are exempt from gift tax.

If you give more than $13,000 to someone in a year, you have to file a gift tax return. You would owe gift tax on the amount of the gift in excess of $13,000. The gift tax is paid by the donor and not by the recipient, at a rate of 35%. But you could apply the excess against the unified credit.

As explained by Kay Bell in an article for Bankrate.com, the federal gift tax and estate tax are combined into one unified tax system. The rules for 2011 allow you to make gifts of up to $5 million during your lifetime without having to pay gift tax. But if you use this exemption to offset your gift tax you are reducing the unified credit available to you to offset your estate taxes.

Sources:

Eight Tips from the IRS to Help you Determine if your Gift is Taxable - IRS

Form 709 '" United States Gift (and Generation-Skipping Transfer) Tax Return

The Gift Tax - TurboTax

Instructions for Form 709 - IRS

Kay Bell, "Estate tax and gift tax amounts" '" Bankrate.com

Publication 950 '" Introduction to Estate and Gift Taxes '" IRS

William G. Kistner, "Nonspousal joint tenancy can create tax liability" - BNET