Estate Plan Review: The Joint Account Mistake That Can Cost Families Millions

Protecting and Preserving Wealth Episode 83 – Reviewing and Updating a Trust and Estate Plan

Speakers: Bruce Hosler, Jason Hosler, Alex Koury, & Jon Gay 

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Jon Gay (00:06):

Welcome back to Protecting & Preserving Wealth. I’m Jon Jag Gay, joined as always by Bruce Hosler, Jason Hosler, and Alex Koury of Hosler Wealth Management. Always good to be with you guys.

Bruce Hosler (00:15):

Great to be with you guys this morning.

Jason Hosler (00:17):

Hey there, Jon.

Alex Koury (00:18):

Jon, how are you today, my friend?

Jon Gay (00:20):

I’m good. And today, we are talking about a very important topic. And not because it’s complicated, but because it’s often overlooked.

Most families believe they’ve handled their estate planning; they’ve checked the box; there’s a will somewhere. Maybe a child was added as a joint owner to an account for convenience.

But most of the time we find estate planning is something that people know they need to do, but they’ve never really gotten around to it or even updated it. So, today we’re going to walk through a real-life scenario the team recently encountered. One that highlights how good intentions without proper planning can lead to unintended legal, tax, and family unity consequences.

Alex, do you want to set the stage for us here?

Alex Koury (01:02):

Absolutely, Jon. So, we’ve been working with a client, for a few years now, that we knew her mother had dementia. She lived out of state, all the way across the country, and her siblings were helping take care of the mother, of course.

And recently, the mother passed away. Well, comes to find out that legally, she died without a will. She died intestate, and there was no trust plan either. One of their largest assets that the mother owned was a brokerage account that was in joint tenancy with one of the siblings.

Jon Gay (01:34):

So, just to reiterate there, one of the biggest assets was a brokerage account that your client’s mom owned with one of her siblings?

Alex Koury (01:42):

That’s correct.

Bruce Hosler (01:42):

It became jointly owned with the sibling because she put it into a joint account with the sibling. And we’re not sure of all the details of who was advising them or advising the mother to set it up that way.

But the brokerage account was held in joint tenancy with rights of survivorship between the mother and the oldest sibling, who lived close by. And I’m sure they had good intentions, and they were trying to avoid probate.

Jon Gay (02:15):

So, what happened next?

Jason Hosler (02:17):

Well, because the account was held in joint tenancy, that means when the mom passed away (the other owner, the sibling), that account automatically becomes the sole property of that oldest sister who was on the account.

Alex Koury (02:31):

Yeah. And the problem with that is that the other siblings were technically disinherited from this estate, from the joint tenant account, and probably other assets as well.

Simply put, by just having the brokerage account in the name of one of the siblings and the mother, it automatically excludes the other two siblings from being potential inheritors of those assets.

Even though that may not have been the intent of the type of estate plan that they thought was in the best interest of everyone.

Bruce Hosler (02:57):

So, the unintended consequence (that’s what happens when there is not proper advice), is even though the oldest sibling now wants to distribute the assets fairly with her other siblings, there’s no legal obligation for her to do that.

Additionally, because the amount of money involved, if the older sister now gives the correct shares of the funds of the investment of the stock to each of the siblings (as was her mother’s wishes), she’s likely going to have to pay a tax professional to file a gift tax return (a 709) for each of her siblings to use a portion of her lifetime exemption amount, perhaps to the detriment of her own family and her own children.

And certainly, this can potentially create tension between her siblings and resentment and potentially, a long-term family conflict.

Jon Gay (03:53):

Bruce, you made a really good point at the end there. Because I was thinking about the dynamic of siblings, of course, at this point, because one person has everything. And who wants what, what does she intend to do?

But you’re right, that lifetime gift tax exemption, if she’s trying to dole this out fairly, that is going to eat away at that lifetime exemption and could hurt her down the road for her potential inheritors if she has kids or things like that. That’s a great point.

Bruce Hosler (04:19):

Absolutely. And then had the investment simply been held in a trust, or even if they had just left them in an individual brokerage account, the assets in the trust or the account would’ve received a full step-up in cost basis when mother died, potentially leaving the entire account balance as a tax-free inheritance to her children. This is the big shame.

Jon Gay (04:45):

We are getting to the tax implications now. Forget the family thing, the tax part is huge, as you just mentioned, Bruce.

Alex Koury (04:50):

And here’s the issue with all this. So, the original shares that were held in this account were purchased at a price of about $10 per share. And now, currently in the marketplace, those are worth $1,000 per share, and there’s about 10,000 shares in total in this account.

So, because of, again, the way that the estate was set up with a joint tenancy, with one of the siblings being the surviving tenant, only 5,000 shares receive a step up in cost basis. So, the 5,000 shares go from $10 to $1,000 per share.

Now, if the sister gifts the shares to her siblings, they’re going to receive low-basis stock more than likely as well as a tax bill associated with selling those shares as a capital gain as opposed to getting a full step-up in the total cost of all the shares, so no one had to pay any capital gains taxes.

Jon Gay (05:46):

I want to make sure I’m doing the math right on this before I turn to you, Jason. So, we said $10 a share, now $1,000 a share. $1,000 per share times 10,000 shares is $10 million, and you only get to step up a basis on half of that?

Jason Hosler (06:00):

That’s right. Just one half. So, those other 5,000 shares with the $10 basis, that’s $5 million of unrealized capital gains.

And at a 20% capital gains rate, that’s a million-dollar tax bill that could have been avoided simply by having the correct account titling and paying attention to these types of estate planning questions and avoidable mistakes ahead of time.

Jon Gay (06:28):

So, it was too late to prepare for this particular family that you’re talking about. But let’s talk about what they could have done prior, and hopefully, that can help save some of our listeners.

Bruce Hosler (06:38):

All they had to do was leave the account in mother’s name or create a revocable living trust and set the account in a revocable living trust. Either one of those would’ve avoided this problem.

And the other thing that I want to make sure for our listeners, it’s very clear here, is when the sibling gifts those shares to her siblings, her cost basis is only $10 a share. That cost basis goes to their sibling receiving that gift and they maintain that same cost basis of only $10. They don’t get to step up, and that’s what creates the big taxable event. That could have been avoided and could have been zero taxes, a full step up in basis on all $10 million.

Now, good estate planning importantly involves proper account titling and holding the right type of assets in the right type of account with proper coordination between the assets, whether it’s real estate or brokerage or IRAs.

And it’s not just about having your legal estate documents prepared. Good estate planning does require you to have the necessary legal documents, so you don’t end up with a result like what we see here.

Alex Koury (07:51):

That’s right. A lot of folks see and think of estate planning as being a very expensive process because you’re thinking attorneys get involved and we have to pay all these extra fees and it’s the hourly cost, so forth and so on.

But in this example, we can see how large the cost is, which is a million dollars of capital gains potentially in the future.

Bruce Hosler (08:10):

No, that’s actual taxes, Alex. That’s not the capital gains. That is the tax itself. A million dollars of tax.

Alex Koury (08:17):

That’s right. Exactly, Bruce, thank you for clarifying that.

Jon Gay (08:20):

We’re talking some pretty big numbers here. It’s pretty easy to get them confused. I’m glad we clarified that.

Alex Koury (08:24):

They are. And all that really had to happen is (especially when the family knew of the condition of the mother in this case) being able to sit down together before this event occurred of her actual death and just reviewing the current estate planning documents with a trusted advisor.

Someone that could at least give you the review of the overhead of all the nuances of what goes into those documents regarding asset titling, beneficiary designations.

Again, getting that view to know what’s actually going to happen should this event or when this event occurs, when the death occurs. And then from there, proper steps could have been taken to avoid this very costly situation.

And that’s what we’re saying with our clients today because we don’t want people to have these situations obviously. We help our clients with complimentary estate planning reviews of their trust and estate documents to catch those errors that can be very, very costly.

Jason Hosler (09:20):

And just think about the conflict that this family might face now. You’ve got half of those shares that don’t get a step up in basis.

And you’re going to have to have a decision made about, “Are those the shares that get gifted? Is it the sister that’s on the account that keeps those shares? How do you split that up?” You’re creating a lot of potential for tension and conflict by not having this done ahead of time.

Jon Gay (09:42):

And I want to underscore here that we’re not singling out this particular family- because this is really a common problem. And we see this, I’m sure, every day in the industry. Bruce, I know you’ve got some statistics about how widespread this issue is in the country.

Bruce Hosler (09:56):

Well, yes. Let’s just bring this to the forefront. 60% of Americans have no estate plan. That means no will, no trust, no powers of attorney, no documents for their estate planning at all. And nearly 70% of estate plans are outdated.

And we just went to a conference last week (Jason and Alex and I) on this, and one of the things that kind of came out of there that kind of caught me off guard … now my estate plan, my trust was prepared in 2017.

And one of the things that came out of the conference was, “Hey, if your trust was prepared before 2019, you probably don’t have digital asset language in your trust or your will or your powers of attorney.”

That has all come to the forefront in legal documents in 2019 and later. So, my trust was prepared in 2017, I need to update my stuff. And this applies to a lot of our clients. We need to be reviewing your documents and making sure that you have it.

And now people will say, “Well, I don’t have any cryptocurrency.” No. Digital assets involves … what about access to your iPhone and all of your pictures on your Facebook account, or all the pictures in your iPhone account? There are all kinds of digital assets that all of us have, and we need to have the access to that.

Jon Gay (11:18):

Something I see working full-time in podcasting is the law does not always keep up with the technology. So, that’s a really good point, Bruce. That that’s something that if you’re in the minority and you’ve established your estate plan a while back, you really need to take a look at that and make sure this modern piece of it is considered.

Bruce Hosler (11:36):

Absolutely. And this is just one case. I mean, there’s other tax law and other implications that are being updated all the time.

Alex Koury (11:42):

That’s right. So, it’s not just a one and done event like most people want to believe. It has to go through a process of updating every few years like Bruce had mentioned. Because families change, dynamics change and loss change.

Bruce Hosler (11:54):

A short review today folks can prevent years of conflict in your family if you love them. Please do this.

Jon Gay (12:01):

It’s not about perfection, it’s about clarity. And you talk about updating this, I know psychologically when I’ve got my to-do list every morning, I like to check stuff off. “Okay, that’s done, that’s done, that’s done.” I feel like a lot of people do that with estate planning. But as you mentioned, it’s a living plan. You need to adjust it as life and needs change.

So, gentlemen, if somebody wants to contact you at Hosler Wealth Management regarding estate planning or anything really related to their financial future, what are the best ways to reach you?

Bruce Hosler (12:28):

Certainly, they can reach us on the website, Jon, at hoslerwm.com. In Prescott, they can call us at what number, Jason?

Jason Hosler (12:36):

Give us a call at (928) 778-7666.

Bruce Hosler (12:40):

And Alex, in Scottsdale, how do they get us down there?

Alex Koury (12:43):

(480) 994-7342.

Jon Gay (12:47):

Really important stuff, gentlemen. I’m glad we covered this today. Again, not because it’s complicated, but because a lot of people have not done this. We’ll talk again in a couple of weeks.

Bruce Hosler (12:55):

Thank you, Jon.

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Disclosure: (12:56):

Investment advisory services are offered through Mutual Advisors LLC, DBA Hosler Wealth Management, a SEC registered investment advisor. Securities are offered through Mutual Securities, Inc., a member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively Mutual Group) are affiliated companies.

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