With estate planning, as in life, I couldn’t agree more with the thought that the simpler the path to a solution the better. However, one area where this philosophy can come back to haunt you is the simple act of adding a child, or possibly a trusted friend, as a joint owner of your bank or credit union accounts. Perhaps, as you read this, you’ve done so for estate planning purposes with the plan that the account will transfer to the added owner upon your passing, or for convenience purposes so that the added owner can help you pay your bills in the event of your disability, or because you go on extended trips out of town. Adding an owner seems simple enough, and what could be the harm, right?
An issue to consider when adding an owner to your accounts is that now you’ve opened up that account to your joint owner’s creditors. Your joint owner may never have contributed a dime to your account, but his or her creditors won’t care. They will see that money as your joint owner’s asset, and you could find your account drained due to your joint owner’s debts. You then face a legal battle with the joint owner’s creditors to prove that the funds are 100% yours; that you added the joint owner only to assist you, or so that the joint owner would receive the account upon your death, and that the funds should be returned to you.
Under Michigan law, the surviving joint owner of a bank account (pursuant to MCL 487.703) or a credit union account (pursuant to MCL 490.56) is presumed to be the owner of those funds. Now, that may be precisely what you’ve intended. However, keep in mind that upon your death such funds will transfer directly to the surviving owner. They will not transfer as your Will or Trust provides. So, for example, if you intend that your three children share equally in your estate, but you only identify one child as a joint owner of your account, that child will receive the money in the joint account, plus an equal share of your estate that passes in accordance with your Will or Trust—that is, unless there is language in your Will or Trust compensating for the joint account funds received by the one child. Your simple solution may be to add all three children as joint owners on your bank or credit union account, but recall that you will then be exposing the account to the creditors of each of your three children.
Solutions you say. Here are options to consider and they are amazingly simple:
1. If you are seeking the convenience of having someone available to pay your bills, instead of adding a child or other individual as a joint owner on an account:
(a) ask your financial institution to grant that individual check-writing authority only, versus adding him or her as a joint owner.
(b) ask your attorney to prepare a Durable Power of Attorney (DPOA) granting the person or persons you identify with agency authority to step in and help you with the specific financial matters you identify in the DPOA document. DPOA documents can be written to be effective immediately or when, for example, you have been determined by two physicians to be incapable of handling your financial affairs.
A word of caution, granting check-writing authority, or giving someone agency authority under a DPOA, should only be done after you have carefully considered the persons you are giving such authority. Granting access to your finances is a powerful tool to assist you but can be devastating to you if such powers are placed in the wrong hands.
2. If you are seeing the convenience of transferring funds upon your death without a Will or Trust, or even sometimes in conjunction with a Will or Trust, instead of adding one or more individuals as a joint owner, ask your financial institution to identify the individual or individuals as a transfer-on-death (TOD) or pay-on-death (POD) beneficiary. You can change those beneficiaries during your life, if you wish. Upon your passing, typically the one or more individuals you identify as TOD/POD beneficiaries simply need to present your death certificate, identification and potentially other claim related documents to the financial institution to receive the funds. The TOD or POD designation does not give the beneficiary, or his or her creditors, access to your funds during your life. Do recall, as discussed above, that if you have a Will or Trust, you may need to consider language adjusting for funds received pursuant to a TOD or POD designation.
Sometimes clients tell me that they’ve taken the positive step of identifying someone as a TOD/POD beneficiary, rather than a joint owner, but then they tell me that the beneficiary is one of their five children, with the understanding that the single beneficiary will split the funds with the other children. Consider some of the risks:
(a) the identified child is the presumed owner and may decide not to share;
(b) if the funds are significant enough, the identified child may have difficulty sharing without having to file a gift tax return, and
(c) if the identified child has a creditor problem, the funds may be taken by his creditors before he even has a chance to share with his siblings.
In short, if you are inclined to use TOD/POD designations, consider identifying to your financial institution each beneficiary whom you intend to receive a gift, rather than a single beneficiary who is then expected to share.
You have undoubtedly worked very hard for the assets you have; under the right circumstances simple solutions may be available, whether for modest or large estates. However, pitfalls such as those raised above must be considered. Kreis Enderle estate planning attorneys can assist you in identifying and addressing estate planning issues to help you meet your planning goals.