Many clients inquire about utilizing joint accounts in an attempt to meet two different estate planning objectives:
While these are certainly worthy objectives, using joint accounts as a means to achieve those objectives may lead to unintended consequences.
First, problems can arise when a client intends to add a trusted friend or family member as a joint owner of an account solely for purposes of “convenience.” The newly added joint owner may be assisting the client with managing the client’s financial affairs and having access to a bank or brokerage account seems like an easy way to facilitate this relationship. However, what happens to the funds in the account upon the client’s death? The unsuspecting client may not realize that adding a joint owner to the account might grant rights of survivorship to the assets in the account, which may or may not align with the client’s estate planning objectives. What if, for instance, the client wanted the funds in the account to be divided equally amongst the client’s children? The addition of the joint owner to the account has muddied the waters and opened the door to litigation between the joint owner and the client’s children as to the rightful ownership of the assets in the account.1
Second, a joint owner of an account has rights to the assets in the account, regardless of whether the joint owner contributed any assets to the account. Suppose again that the client has added a trusted friend or family member as a joint owner to an account for purposes of facilitating the management of the client’s financial affairs. What if the client’s trust is misplaced and the joint owner begins using the funds for his or her personal use? Odds are that those funds will never be recovered by the client or the client’s heirs and, on the remote chance the funds are recovered, it will likely take months of expensive and time-consuming litigation to do so.
Finally, suppose the client adds a nephew as joint owner to the client’s bank or brokerage account with the full intention of having the funds in the jointly held account transfer to the nephew outside of probate after the client’s death. Suppose further that the client’s will designates that all of the assets be divided equally amongst the client’s children. If the client’s children have not been informed of the client’s intent to leave the jointly owned account to the nephew, the children may assert that the funds in the account should be included in the client’s estate and divided amongst the children, again opening the door to litigation.
If using joint accounts is fraught with the issues cited above, what alternative exists to meet the same objectives of convenient funds management and transfer of funds outside of probate? One possibility is to use a combination of a durable power of attorney and beneficiary designations. The power of attorney allows the client to appoint a trusted family member or friend as the client’s agent for purposes of managing the client’s financial affairs. The power of attorney also creates a fiduciary relationship between the client and the agent, meaning that the agent must act at all times in the client’s best interests. What’s more, the appointment of the agent does not give the agent any ownership rights to the client’s assets upon the client’s death. If the client wants the assets that are held in a bank or brokerage account to be transferred to designated beneficiaries outside of probate, the client can simply make a payable on death (P.O.D.) or transfer on death (T.O.D.) designation with the bank or institution that manages the account. These designations allow the assets held in the accounts to transfer to the named beneficiaries outside of probate.
There may be situations where using joint accounts makes sense for your estate planning purposes. However, clients would be wise to make sure they understand the full spectrum of potential issues before deciding that joint accounts are the right tool to help them meet their estate planning objectives. If you are unsure about whether a joint account is the right tool for your planning needs, please contact a Maddin Hauser attorney for guidance.
1See, In re Estate of Langer, No. 342816, 2019 WL 2438913, at *1 (Mich Ct App, June 11, 2019), where niece of decedent who was added to six of decedent’s accounts as joint owner for purposes of convenience asserted right of survivorship over accounts and funds therein after decedent’s death, despite evidence of decedent’s intent to have such funds divided amongst his children.