San Antonio Express-News
July 26, 2005

Can ROS be Challenged?

copyright 2005, Paul Premack

Bank deposits in Texas belong to the person who owned the funds prior to placing them into the account. As the owner, you have a well-established legal right to decide who gets the funds when you die. State law determines the property rights of your son when you make these arrangements.

Section 439 of the Texas Probate Code tells us that any funds on deposit at the death of a party to a joint account belong to the surviving party or parties against the estate of the decedent. However, there must be a written agreement signed by the party who dies, and the agreement must specify that it is with right of survivorship. Most banks and credit unions have language in their account agreements that satisfy the legal requirements.

The other kids can try to challenge the arrangements, but must have valid legal grounds to do so. For instance, if the bank account agreement is not signed by you, it is invalid. Further, the courts have invalidated several account agreements that were too vague in their wording. To cure that, the law was changed to provide "safe harbor" wording: if the account agreement says, "On the death of one party to a joint account, all sums in the account on the date of the death vest in and belong to the surviving party as his or her separate property and estate" then it is legally sufficient.

Practically, you should discuss your choice with each of your children. If this is the way you want it and they have the gumption to disagree, let them make their complaints directly to you. If you hide your choice, you are leaving your son to fend for himself among surprised siblings whose expectations have been dashed. If they know about your choice directly from you, they are less likely to challenge it after you die.

As to your tax question, when you pass away your son does not report these funds as income on his 1040. Even though he is does not become owner by virtue of probate, getting the money is still an inheritance, which is, not taxable income. If any of the assets you are leaving to him are not just cash accounts, but hold stocks or bonds instead, then he gets a free step up in basis as well. Congress passed a law that will limit the step up in basis starting next year. Most people won’t be negatively affected, since even the new law allows a $1 million step up.

Depending on the amount of money you are leaving, there may also be federal estate tax issues. However, the funds will have to exceed $1.5 million for estate tax to apply, and next year that exemption goes up to $2 million. So overall, there are very few tax implications for most people.