Avoid This Common Banking Error

Many people make mistakes in titling bank and investment accounts. Often advisors and bankers counsel customers to “put your child’s name on the account” or to set the account up as a “pay on death” (POD) account. However well-intentioned the advice, the results of either approach to titling an account can be surprising and unpleasant. Good intentions do not good advice make.

The Allure of Joint and POD Accounts

Often the attraction is probate avoidance. Either a joint account with survivorship features or a POD account will pass as a nonprobate asset and avoid a state-mandated probate process, which can in exceptional cases take several months to a year or longer.

For joint accounts, the attraction is often convenience. Unlike a POD account, during the parent’s lifetime a joint account holder has immediate co-ownership rights, and, thus, immediate access to the account. An older person may feel better knowing that a trusted son or daughter has immediate access to an account “in case something happens.”

The Dangers of Joint and POD Accounts

If the POD or joint account payee is a child with disabilities, the result could be terrible for the child upon the parent’s death because the receipt of the account could jeopardize continuing qualification for public benefits such as Medicaid or SSI.

There are other compelling reasons why a joint account may not be the proper approach:

• The co-owner child now owns the account as much as the parent. What if the child is sued? What if the child goes through a messy divorce? Or what if the IRS takes a keen interest in the child’s affairs? Those events happen to the best of children; nevertheless, in those cases the joint account will be presumed to be owned by the child.
• Another problem is that the co-owner/child’s sibling may be out of luck. This happens all the time. For example, Mom wanted the kids to share equally, but after Mom is gone Sis suddenly recalls that Mom wanted her to have the accounts since she “was the one who always helped Mom.” Because Sis was a co-owner of Mom’s accounts and likely had survivorship rights, she owns the accounts now. Usually there is nothing the rest of the family can do about it, even with legal assistance.

A Better Way

If the goal is asset management in the event the owner becomes incapacitated, one effective approach is a properly drafted power of attorney.

A power of attorney has nothing to do with appointing lawyers. The word “attorney” has its roots in an old French Norman word for “legal substitute.” A power of attorney is simply a document signed by someone called the “principal” appointing an “attorney-in-fact” or “agent” to manage some or all of the principal’s financial and business affairs.

The terms of the power of attorney document control what the agent may, or may not, do. If the document covers a broad spectrum of duties, then it is a “general” power of attorney. An agent can be given very broad powers, but if that makes the principal nervous, the instrument can require the agent to secure some other person’s permission before use. (Note: Many banks and financial institutions prefer to use their own POA forms, but a growing number of states have laws requiring the institutions to accept other, often attorney-drafted, power of attorney documents.)

If the goal is to avoid probate upon death of the account owner, the better approach may be a revocable or living trust. The assets in the trust will avoid probate. In fact, a revocable trust can also assist in post-incapacity management of the person’s assets because a successor trustee named in the trust agreement can step in to handle continuing management of all assets held in the trust. Moreover, in contrast to the unlimited access of a joint account co-owner who may have issues with his own creditors, the assets in the trust are protected from the trustee’s creditors.

Finally, all of the above considerations especially apply if the parent has a child with disabilities. There will rarely, if ever, be an appropriate time to name a child with disabilities as the co-owner of a joint account or the beneficiary of a POD account. Carefully consider using a special needs trust, either under a will, as part of a revocable trust, or created as a separate trust document, to hold that child’s intended inheritance. Properly drafted, the special needs trust assets will not jeopardize the child’s continuing eligibility for various public benefits.

Here’s the point: Do not put your children on the accounts as a joint owner. Instead, execute a power of attorney that grants appropriate sorts of powers to an agent whom you completely trust to assume the day to day responsibility for managing your financial and business affairs when and if needed. Alternatively, consider a revocable trust. In the meantime, keep the accounts in your name.

The downside to the advice given here: Some fees to a lawyer. The upside: You may avoid a train wreck.

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We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.