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When family members use 'secret' credit cards

By Alan Klayman

Maturing Loans
Maturing Loans, Alan Klayman
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.

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Question for the CreditCards.com expert

Dear Maturing Loans,
My stepmother has been secretly advancing funds on credit cards that are in her name only. She is giving the money to her kids. My father doesn't know any of this as the credit card statements go to a post office box she set up for the sole purpose of hiding them from him. His house (paid off before my mother died and he remarried) and the bank accounts are all in a living trust. She brought zero cash or assets to the marriage, in fact only credit card debt he paid off when they got married. Would my father be liable for any debt she has accumulated if he succeeds her? And if she succeeds him, will the trust be liable for any debt she has accumulated? -- Dean

Answer for the CreditCards.com expert

Dear Dean,
I think I understand your question, but it has some complications, so I'll try to walk through each part so we can come up with some conclusions for you.

Your stepmother is taking money from her credit cards and giving the money to her kids. I know you said this is secret, and apparently your father isn't aware of the post office box, but have you approached anyone in your family and asked about this? Maybe your father does know. Maybe there are ill family members that need assistance. If you know about the gifting and the post office box, don't you think others know, too? 

Either way, your stepmother allegedly has been accumulating debt and gifting money to other family members. First, let's look at the tax implications of her "gifting." Tax-wise, your stepmother is allowed to give between $10,000-$12,000 to as many people she wants without owing gift taxes. Any amount in excess of this amount will result in a tax to her, and your father if they file jointly. Many accountants and CPAs tell me that it is a best practice to file a gift tax return (Form 709) when you gift, even if you don't owe taxes, to show a record of who gave the money and how much, so you can show you are in accordance with the current rules and regulations. The IRS has a section on gifting you may want to review. 

You claim that your father's house and bank accounts are all in a living trust. Is this a revocable or irrevocable living trust? You need to find out if your father can take money in and out of the account at will, or does the account have its own tax identification number, pay its own taxes, and the money cannot be removed by anyone except the trustee (not your father) under specific rules of the trust?

These questions are very important to know the answers to. Many living trusts are extensions of people's tax ID numbers (Social Security numbers) and provide a way to transfer assets conveniently and without going through the probate process. Many trusts are irrevocable. This means that the money is truly the property of the trust, not the people gifting money into the trust (like your father), and there are stringent rules as to who and when money is paid out of this trust. Generally, assets that are not subject to probate are not available to the executor of the estate, but this is a general rule, and depending on your state's laws you need to seek legal counsel to determine what applicable regulation applies in the state in which your father lives.

You may also want to find out if your father's name is on these credit cards or if he is a joint account holder. If he is, then there is the strong possibility that his assets can be attached to these debts. Do they live in a community property state? If they do, then there are a number of other factors to consider under state law concerning assets, debt, and the real possibility of a 50-50 split.

CreditCards.com recently ran an article on debt and death, which can help you understand some the questions you raised.

To review: Depending on your family situation, you may not be the only one who knows about the post office box. Find out if your father knows and maybe there is a reasonable explanation.

The situation needs to be reviewed by an attorney, and you need answers to the following questions to save time, money, and future headaches:

  • Is the trust revocable or irrevocable?
  • If it is revocable, what provisions does your father's home state have for the attachment of nonprobate assets?
  • If it is irrevocable, what are the terms of the trust? Does the trust assume the debt of the deceased spouse?
  • Do your father and stepmother live in a community property state?
  • Is your father named as a joint owner on these credit cards?

Again, get these answers, see an attorney if the family explanation is not a reasonable one, and good luck.

See related: Hiding credit card debt, Debt and death

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Published: October 29, 2008


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