“Adding” Family Members to Bank and Investment Accounts: Have You Accomplished What You Intended?

Title:
“Adding” Family Members to Bank and Investment Accounts: Have You Accomplished What You Intended?
Publication:
Tax, Trusts & Estates Update June 2015
Attorney:
Practices:

As we age, many of us wish to grant access to our financial resources to a trusted family member or friend.  The goal is usually to ensure that someone is able to “take over” for us to see that our bills are paid in the event that we are not able to keep up with financial details in a reasonable way.  To accomplish this, estate planning lawyers typically urge clients to sign a document called a “durable power of attorney,” which designates one or more individuals to serve in this role as “agent(s)” for the client, and indicates the scope of the authority granted over the client’s personal business affairs.  

In recent years, it has become increasingly common for individual bank and investment account owners to designate beneficiaries to receive both their retirement and non-retirement account assets upon their death.  For non-retirement accounts, this is accomplished by simply having the owner sign forms provided by the bank or investment house, and once that paperwork is in place, the account so designated is typically called a “pay on death” or POD account.  This form of account ownership is promoted as a way to simplify affairs after the account owner passes away, especially because POD accounts pass to the named beneficiaries without the delay of going through the probate process.

Another common occurrence is for the account owner to name one of several children as a “Joint Tenant” on an account.  Again, the goal may be to facilitate access to the account by the child who is overseeing the client’s day to day needs.  The bank or investment house paperwork is easy, and these accounts also avoid probate since they pass to the surviving joint tenant on the death of the other joint tenant.

While these accounts can be quite useful, if they are not coordinated with the overall estate plan, they can have unintended consequences. The amounts held in either a POD account or a joint tenancy account are not governed by the original account owner’s will.  Where there is no will, these accounts will not be governed by state intestacy law, which typically divides an individual’s assets into equal shares for each child (assuming there is no surviving spouse).  It would appear that in many cases, neither the bank employees who promote them as easy ways to avoid probate, nor the account owners, understand the relative ease of the probate process, or that implementing these types of account designations can upset a well thought out estate plan.  When less than all of a decedent’s children are named as POD beneficiaries or joint tenants, there is also the potential for litigation, or at least strained relations among the children. 

Too often, the family learns only after a death that the POD or joint tenancy account has upset the estate plan, so that one child is legally entitled to a larger share of the deceased parent’s assets than his or her siblings.  This is especially problematic where bank account assets are a significant portion of the estate. One common scenario is where the child living closest to an elderly parent is “added” to the parent’s accounts to facilitate payment of the parent’s bills. In many cases, the goal is really to give the child power of attorney over the account to use the funds for the parent’s benefit during a period of decline. But if the bank offers either POD or “joint tenancy” paperwork instead of the bank’s form of power of attorney, the child “added” to the account will inherit the contents of the account - cutting out the other children named in the will.  Even where all children are named as "joint tenants" or POD beneficiaries, there can be problems.  For example, if there are no other assets from which the executor of the estate can pay bills and taxes, he or she will need to obtain funds from the "joint tenants" or POD beneficiaries for this purpose.  One child may be reluctant to contribute his or her fair share of these costs or the funds may no longer exist - again causing unnecessary strife. Also, what happens to the share of a POD beneficiary who predeceases or dies simultaneously with the account owner? Is this what the account owner intended?

So what can be done? If the child named as a "joint tenant" agrees that the designation was only intended to aid the parent’s bill paying, that child can voluntarily choose to “disclaim” (refuse) the account, in which case it may become part of the probate estate to be governed by the parent’s will. But if there has been tension or disagreement between a child living locally and his or her siblings, that child may believe he or she “earned it” and refuse to disclaim.  Even if the parent also intended to give “extra” to the local child, the stage is now set for litigation.

Account owners should also be aware that POD and joint account designations will not stop the imposition of New Jersey estate tax liens on these assets after death, even if such accounts are designed to avoid probate, and that allowing the assets to pass outright to the beneficiary by such designation may result in a loss of asset protection for the beneficiaries that was an integral part of the estate plan (e.g., protection from the beneficiary’s creditors, spouses, his or her own spending habits, etc.).  In many instances, account owners seeking to avoid probate should consider funded revocable trusts that are carefully coordinated with the estate plan, rather than establishing POD and joint accounts.

Please review your accounts to ensure that they are held in the intended form, and are consistent with your overall estate plan. Corrections are easy to make now, and can avoid unnecessary conflict among your loved ones later.