Personal Finance

Money Matters: Estate planning advice for couple worried about taxes

Q. We have a POD clause on our savings and checking accounts and a TOD on our brokerage accounts. We did this to make funds immediately available to our two children upon our death. Now we are wondering what the tax consequences of this action might be. (Will they be subject to a gift tax for amounts over $14,000 or will the amounts be added to the estate total, etc.) We didn’t check per stirpes because we weren’t sure what that meant. If we want to gift some money now to our children how much can we gift without presenting them with a tax liability? Hope you can help us sort through this.

A. Just so other readers know what we are talking about, the forms you are referring to allow the assets in the accounts to pass to the named beneficiaries and these designations take precedence over any estate plans established by will or trust. A POD, or payable on death, form is used for accounts held at financial institutions such savings and CDs. For brokerage accounts you would use a TOD, or transfer on death, form. The assets transferred via a POD or TOD are usually non-probate transfers. If your accounts are held jointly, the named beneficiaries are entitled to the assets upon the death of the last surviving account holder.

These are very useful forms but you need to be careful that they fit into your overall estate plan. A discussion about how these forms impact your other estate planning intentions with the attorney that prepared your will, powers of attorney or trust documents is strongly advised. If you don’t have these other documents you need to get these in place and coordinate the POD and TOD designations with the desires outlined in your will or trust.

Per stirpes is a term used to describe how assets should be distributed if a beneficiary dies. If per stirpes is designated then each branch of the decedent’s family will inherit in equal parts and by way of representation. Simplistic example: if a beneficiary with two children dies their share will pass to their two children. This may sound like a good idea but it can get complicated if there are minor children, special needs children or spend thrift children involved. Again, a discussion with an attorney is recommended.

Naming a beneficiary on these forms is not considered a gift. Anyone is allowed to gift up to $14,000 a year to an individual without being required to file a gift tax return (IRS form 709). If you are married, you and your spouse are allowed to gift up to $28,000 to an individual. If the gift over $14,000 comes from only one spouse, you must both consent to what the IRS refers to as “gift splitting.” The person receiving a cash gift is not liable for any tax on the gift even if it is over $14,000. If they are gifted an appreciated asset when they sell the asset they may owe capital gains tax. Example: you gift shares of a stock you bought for $10 a share and the value when gifted is $20, if they sell the stock, depending on their tax bracket, they may owe capital gains tax on the $10 gain. If you gift above the annual limit you will need to file a gift tax return and this amount will reduce your lifetime exemption which in 2016 is $5.45 million.