Joint bank accounts don't go through probate because disposition of ownership is automatic. For example, if you have a joint bank account with a parent and the parent dies, in most cases, her death gives you automatic full ownership of the account. Bypassing probate does not give you a free pass on taxes, however. If there are two names on a bank account and one dies, you may have to pay inheritance tax.
Inheritance Tax is Only Assessed in Certain States
As of 2018, only six states charge inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania. If you live in one of those states, or the deceased co-owner did, your inheritance may be subject to the tax. The tax bite depends on your relationship with the deceased. Spouses don't pay any inheritance tax, and some states also waive the tax for sons and daughters. If the co-owner is a friend or business partner, you take the full hit.
Indiana once had an inheritance tax, but it was repealed in 2013. If Indiana is the controlling state, you may have to pay an inheritance tax if the decedent passed away on or before December 31, 2012.
Inheritance Tax on Joint Accounts
A joint bank account is an account co-owned by two or more people. Depending how the account is set up, the owners may have to make withdrawals and other decisions together, or each owner can withdraw individually. Power over the account has nothing to do with who contributed the money. If your parent puts your name on his account to help him manage his money, all the money becomes yours when he dies, even if you didn't put any money in.
As far as your state's tax collectors are concerned, you and your co-owners each own an equal share of the money. For example, if you and your mother have a $12,000 joint account, you have $6,000 each. When she dies, you inherit $6,000. If you're the one who put all the money in the account, that makes no difference. Legally, when she dies, you still have a $6,000 inheritance, even though it's your money.
If you're staring at an inheritance tax bill, it may comfort you to know that you don't do the paperwork. The deceased's executor handles taxes on the estate assets including inheritance tax. If, say, you and the deceased had a third owner on the account, that simplifies things: the executor only submits one return for both of your tax bills. If there's estate tax due on the account, the executor handles that too–there is a federal estate tax and regardless of whether your state has an inheritance tax, and many states assess their own estate tax on top of that.
2017 and 2018 Estate Tax Limits
Estate taxes are assessed at a regular income rate, so how much you're taxed will depend upon your marginal tax rate. However, most people will never be assessed an estate tax, as the threshold for taxation is very high. In 2017, property distributions from a deceased person would not be taxed until that person's total lifetime gifts exceeded $5,490,000, and that number has increased dramatically for 2018: the estate tax doesn't begin until lifetime gifts exceed $11,180,000. For example, if your mother passed away in 2018 and over her life gave you $5 million and then left you another $5 million, with no gifts to anyone else, she would not have reached the threshold, and so your inheritance would not be subject to the estate tax. However, if she passed away in 2017 and the same were true, the total gift of $10 million over her life (including the $5 million inheritance) would be subject to tax to the extent of $4.51 million, which is the difference between the amount gifted and the base amount of lifetime gifting permitted.
Note, however, that a person can give away up to $15,000 per year as of 2018 ($14,000 in 2017) to one person without that amount counting toward the total lifetime gift limit. So in the example above, the first $5 million could be reduced depending on whether she gave it to you all at once or in installments over years.