13 Aug My friend added my name to an account. Are taxes due?

Q. A family friend set up a joint bank account with her name and mine on the account. The account has $50,000 in a five-year Certificate of Deposit. She is going to remove her name from the account at the end of the term. What are the tax implications of this whole situation?
— Friend

A. You’ve got a generous friend.

When a bank account is titled jointly with someone other than a spouse, the question becomes whether a taxable gift has been made.

Let’s start with the basics.

The IRS defines a gift as any transfer to an individual, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“This transfer can be either direct or indirect, where full considerations — which is measured in money or money’s worth — isn’t received in return,” Papetti said. “Annual exclusions apply to gifts to each donee of $15,000 for 2019.”

He said a gift is not considered a gift unless there is donative intent. There must be donative intent to characterize a transfer as a gift under the U.S. tax code, he said.

Treasury regulation 25.2511-1(h)(4) spells it out clearly: With bank accounts and most brokerage accounts that a gift will not have been made if an account owner simply adds a non-spouse’s name as a joint owner. Reportable gift transfers occur only if the non-spouse starts to draw funds from those accounts for his personal use (Revenue Ruling 69-148).

An account, in and of itself, has no value, Papetti said.

If you and a friend go to the bank and open a new account with little or no money, it’s not a gift for tax purposes, he said.

“When it becomes tricky, though, is if one of you make deposits and the other withdraws that money,” Papetti said. “If one account owner withdraws more funds than they deposited in excess of the annual gift tax exclusion, $15,000 for 2019, it could require filing a gift tax return.”

If you add someone to an existing account, as noted above, that action in and of itself will not be considered a gift, he said. But in states where joint owners can split off their rights from other joint owners, half of the value of the account would be considered a gift when the name is added.

If a donor makes a gift of more than the $15,000 annual gift tax exclusion, they probably won’t have to pay out-of-pocket gift tax, as each taxpayer has an $11.4 million federal exemption to shelter taxable gifts, Papetti said.

Based on your situation, simply having your name added as a joint owner at the time your friend invested in the CD would not be considered a taxable gift, Papetti said.

“However, at the time your friend removes her name from the CD that will be a taxable gift and the amount in excess of the annual gift tax exclusion at the time will be subject to gift tax and require the filing of a U.S. Gift Tax Return (Form 709),” he said.

Unless your friend has exhausted her lifetime $11.4 million federal gift tax exemption, there will be no out-of-pocket gift tax due because the taxable gift in excess of the annual exclusion will simply reduce her lifetime gift exemption amount, Papetti said.

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This story was originally published on Aug 13, 2019.

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