Estate planning should simplify life for your loved ones, not complicate it. Many people believe that adding an adult child or other heir as a “joint owner” on a bank account is the simplest way to ensure those funds pass forward seamlessly upon death. Indeed, joint accounts can seem like a free and fast estate planning hack, resulting in funds being instantly available to joint account holders. Unfortunately, joint accounts can have unintended legal and familial consequences. Read on to understand the downside of joint accounts, and the benefits of establishing a trust to both safeguard and distribute assets.
Consequences of Joint Accounts
When you add a loved one, like an adult child, as a joint owner on a bank account, you are doing far more than adding a name to a signature card: you are making a substantial and immediate “gift” of the entire account’s value. This seemingly benign act has several serious consequences, such as:
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- Exposure to Creditors and Lawsuits: The most dangerous consequence of joint ownership is risk exposure. Since the asset legally belongs to both parties, that account is now vulnerable to the financial troubles of the joint owner. For example, If your adult child is sued, files for bankruptcy, or faces a major legal judgment (such as a divorce settlement or liability claim), the creditor can legally seek to garnish the entire joint account balance. This can happen even if you contributed 100% of the funds and had absolutely nothing to do with your joint owner’s problem.
- Disruption of Your Estate Plan: In most states, joint accounts come with rights of survivorship. This means that when one owner dies, the assets immediately and automatically transfer to the surviving owner, bypassing your Will and, if you have one, Trust. In this way, joint accounts can severely disrupt your carefully planned asset distribution. If you intended for the funds to be split equally among all three of your children, but only one was on the account, that one child legally receives 100% of the money. This forces the recipient to either voluntarily share the funds (potentially triggering complex gift tax issues) or risk a family feud that lands in probate litigation.
- Risk of Premature Death: There is always the possibility that your joint account holder dies before you do. If they haven’t named a beneficiary on their portion, the account can become temporarily frozen and tied up in their estate’s probate process.
- Disruption of Your Estate Plan: In most states, joint accounts come with rights of survivorship. This means that when one owner dies, the assets immediately and automatically transfer to the surviving owner, bypassing your Will and, if you have one, Trust. In this way, joint accounts can severely disrupt your carefully planned asset distribution. If you intended for the funds to be split equally among all three of your children, but only one was on the account, that one child legally receives 100% of the money. This forces the recipient to either voluntarily share the funds (potentially triggering complex gift tax issues) or risk a family feud that lands in probate litigation.
- Exposure to Creditors and Lawsuits: The most dangerous consequence of joint ownership is risk exposure. Since the asset legally belongs to both parties, that account is now vulnerable to the financial troubles of the joint owner. For example, If your adult child is sued, files for bankruptcy, or faces a major legal judgment (such as a divorce settlement or liability claim), the creditor can legally seek to garnish the entire joint account balance. This can happen even if you contributed 100% of the funds and had absolutely nothing to do with your joint owner’s problem.
A Better Estate Plan: POA and Trust
To maintain control over your assets during your lifetime and ensure a smooth transfer upon your death, estate planners strongly recommend executing a durable Power of Attorney (POA) and establishing a revocable trust. A Power of Attorney legally designates authority, but not ownership, over your financial and legal affairs, if necessary, due to a capacity decline. A POA maintains the integrity of your funds, and ensures they will be managed for you if you become unable to do so yourself.
With a POA designated to manage funds if needed during your lifetime, it’s wise to take the time to establish a revocable trust for the ultimate distribution of your assets.
Once titled in the name of the trust, assets can bypass probate upon your death, and be immediately distributed to beneficiaries following the details laid out in your trust agreement. When a revocable trust is set up, you can act as the initial trustee, but name a successor trustee to take over when necessary. Investopedia offers this quick summary of trust basics as a foundation for planning:
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, a trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary….A living trust, also called an inter-vivos trust, is a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the trustor’s death.
Though it typically takes more time and effort to set up and transfer assets to a trust, than it does to create a traditional will (or arrange a joint account), attorney Larry Parman explains that establishing a revocable living trust can be well worth the effort, noting:
A living trust is a versatile tool … .From maintaining privacy to avoiding probate, it provides solutions that can simplify estate planning and administration…..A living trust can protect you and your assets if you become incapacitated. If you experience a medical condition that renders you unable to manage your affairs, the successor trustee you appoint can step in seamlessly and provide for your care. This arrangement allows for the continued management of your financial matters without the need for a court-appointed guardian.
Appointing A Trustee or Successor Trustee
When choosing a trustee or successor trustee, it is important to consider a reliable person who deeply understands the intentions of the trust and can be counted on to administer the trust accordingly. Unless the assets placed in a trust are complex, financial expertise is not necessary for a trustee, but having time and being organized and diligent are. Ultimately, whether a friend, relation or professional is selected, the trustee has a fiduciary obligation to the beneficiaries—and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, a trustee bond can be required. A trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety Company makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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