Jointly Held Accounts: A Cautionary Tale

When someone dies, his executor or personal representative is responsible for preparing the decedent’s final income tax return and the decededent’s estate is liable for all income tax due.  If the executor distributes the estate without payment of the income taxes, the IRS could hold the executor personally liable for the unpaid income taxes.

In a recent Florida case, this is what happened.  The executor’s excuse for not paying the income taxes was that the income was placed in a jointly held account with his brother and that the brother had agreed to pay the income tax.  However, when the brother later refused, the IRS sued the executor, not the brother, and won.

This case is a reminder that anytime someone uses a probate avoidance technique, like a joint account, or paid on death account or transfer on death account, there are unintended consequences, such as the one above.  The person named as executor as the responsible for paying the income and estate taxes, but may not be able to obtain the funds from her persons who receive the assets.

A much better way to plan is the bucket concept.  Either place all your assets in one bucket or direct that all your assets are to be placed in the bucket upon your death, and then the person in control of the bucket can make sure that he or she has the assets to pay the income and estate taxes due at your death.  Then, once those taxes are paid, the assets can be distributed according to your wishes.  This always works whereas Joint accounts paid on death accounts, do not always work and can have unintended consequences that totally undermine your wishes and objectives.  The bucket noted above is a revocable or living trust that is created upon your death and if fully funded avoids probate at death.

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