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How to Avoid Conflict in Your Estate Plan – Part 1

Joint checking accounts are not always the answer.

At age 65, Louisa Willis was anxious to get all of her estate planning ducks in a row. Louisa decided to forgo the traditional methods of estate planning—a Will and Living Trust– and created a joint checking account, naming her son, Ben, as the co-owner. Louisa’s reasoning was simple.  By creating a joint account, Ben would have immediate access to her funds “in emergencies,” such as long-term care or upon her death, funeral expenses.  In addition, since Ben also owned the account, it would not be frozen upon her death and subject to administration by the probate court, so Louisa deposited $50,000 in the account, her life savings.

Unbeknownst to Louisa, Ben had a gambling problem. Since she did not actively monitor the account, considering it set-aside for emergencies, Louisa was not aware that her son was slowly draining the account to pay his gambling debts. One day on a whim, Louisa decided to “check in” on the account and learned the balance had dropped to $25. Since Ben was also named as a joint-owner of the account, Louisa had no recourse. Ben was legally entitled to withdraw the funds in the account, at any time and for any reason.  Her life savings had disappeared.

Let’s look at a different scenario.  Suppose Ben’s wife, Amelia, decided to file for divorce. In property settlement negotiations, Amelia sought access to the joint account. Although Ben argued that the account was not created for his support, but the support of his mother, the court ruled that 100 percent of the account value should be included in community property.  It was in his name, after all. Although Ben eventually received the account in the final division of property, the account’s value significantly impacted his share of assets received. In effect, Ben was penalized because of the joint account.

Another scenario: Ben began regularly depositing funds into the account, building up a sizable balance. However, upon reaching age 70, Louisa was diagnosed with Alzheimer’s Disease.  After a few years, Ben depleted Louisa’s initial contribution of $50,000, which was used to provide for her care. He then sought government assistance, arguing that the funds remaining in the account belonged to him, not Louisa, and should not be included in the valuation of assets required to determine if Louisa was eligible for government benefits.  The government disagreed, ruling that 100 percent of the funds in the account must be included in the calculation of available benefits.  As a result, Louisa was denied government assistance.

Sometimes, a “simple” method of estate planning becomes a nightmare. Creating a joint account with a child can give rise to several issues:

  • Risk. A joint account provides total access to all funds in the account, for any purpose. While it may be understood that the funds are to be used only for parental care, that does not make it so. There is no way to enforce or regulate the use of funds, nor to recoup funds expended improperly. The account is fair game for any and all addictions, as well as other nefarious purposes.  In addition, all of the funds in the account may be accessed by the creditors of either party, and 100 percent of the account value will be considered  in the calculation of any form of financial or public assistance.

 

  • Estate distribution. Technically, upon death, the balance of the checking account goes to the surviving party. However, if the estate holder has five children and only one is named on the account, there is no requirement that the surviving party share their bounty with the other heirs. While joint accounts may be established with each child, this requires a constant juggling act to ensure the distribution of wealth remains constant. That means if a parent creates a joint account with one child and places all of his or her life savings in that account, all other heirs may be left with nothing.

 

  • Unexpected circumstances. The purpose behind a joint account will fail if the child named as a co-owner predeceases the parent. Half of the account will not pass to the named child’s estate or his heirs, it will revert back to the parent. Unless other arrangements are made, the account will no longer remain out of reach of the probate court. No one has a claim to the joint account but the surviving owner. Without a Will, the remaining balance in the account will most likely be distributed via state intestate laws.

When an estate owner has only one heir and intends to leave all of his or her assets to that one individual, a joint account becomes a simple method of asset management and transfer of ownership upon death. In addition, under certain circumstances, access to limited funds upon incapacity or death may make sense. However, this option should be considered only in conjunction with a comprehensive estate plan. That is the best way to ensure an estate is protected, no matter what happens.

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