What are the gift tax consequences of an adult child making a withdraw from a joint account with an elderly parent?

What are the tax consequences of adding an adult child as a joint account owner to an elderly parent’s existing savings account? Would a withdrawal from the joint account by the adult child fall under the gift tax, or would it be considered a shared asset?

From the IRS’s Instructions for Form 709 on completion of a federal gift tax return:

“If you create a joint bank account for yourself and a donee (or a similar kind of ownership by which you can get back the entire fund without the donee's consent), you have made a gift to the donee when the donee draws on the account for his or her own benefit. The amount of the gift is the amount that the donee took out without any obligation to repay you.”

If the adult child withdrew funds for the benefit of the parent, it would appear that there would be no gift.

In 2019, the amount of the annual gift tax exclusion is $15,000. Any withdrawal for the benefit of the child in excess of that amount would trigger the requirement to file a gift tax return. However, no tax would be due unless lifetime gifts exceeded the basic exclusion amount, currently in excess of $11 million.

There are other considerations with regard to adding a child to an account, including the possibility that the child may die first, the funds may become subject to the child’s creditors, and that it may impact financial aid at the child’s level. In addition, funds passing to a joint owner are not subject to the terms of a will, and if there are multiple children this can cause problems. 

An alternative to consider would be establishing a power of attorney.

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Answered by: Elizabeth W. Kidd, CPA, is a retired accounting instructor in Erie, Pa.