Potential Problems with Joint Ownership

     Occasionally we speak with someone who believes they have taken care of the bulk of their potential estate planning issues by including their children as co-owners on their bank accounts or other investment assets. Since assets only pass through the probate process if owned solely by the deceased, these clients have indeed taken steps to minimize their estate's exposure to the Probate process. However, these clients have not considered the potential downside of co-owner arrangements.

     Adding children as co-owners of real property or bank accounts avoids the need for those assets to pass through Probate, but it also gives those children the opportunity to make use of those assets in whatever way they see fit. While parents may make their children co-owners of accounts with the best of intentions, unexpected events arise that can result in the child making use of funds that their parent relies on for day-to-day expenses. Even without the child accessing the funds for their own needs, the account may be subject to the claims of the child’s creditors, thus creating the potential for even greater loss to the parent. Even if there are no problems during the parent's lifetime, co-ownership situations can create problems following the death.

     Presume a parent intends to split their estate between three children, but names only a single child as the co-owner of the bank account that holds the bulk of their estate. Following the parent’s death, that single child is the sole owner of the bank account and has no legal obligation to share the assets contained in the account with siblings. Even presuming that the child desires to follow their parent’s wishes to share the assets in the bank account, distribution of those assets now has tax implications for the child, as opposed to the parent's estate. Some clients understand these negatives, but believe that naming their children as co-owners of an account is unavoidable for other reasons.

     As parents age, circumstances often require a child to assist their parents in the budgeting and bill paying process. If this assistance reaches a point where the child is handling most of the check writing, parents commonly add the child as a co-owner on the account for everyone's convenience. This change, while seemingly innocuous and beneficial to the parent, creates the potential for  the problems discussed above. Thankfully, simple estate planning techniques can easily avoid all of these problems and allow children to assist their parents with the minimum of effort.

     By executing an Immediate Durable Power Of Attorney, a parent can give their child the ability to manage the parent’s finances without becoming co-owners of an account. This allows the child to assist their parent with bill paying while protecting the account from the child's creditors. The same result is achievable by changing the ownership of the bank accounts to the name of the Living Trust and naming the child as a current co-trustee. The additional benefit of using a Living Trust is that assets held in the name of the Living Trust do not pass through Probate after the owner’s death.

     Any time an individual gives another person the authority to act on their behalf, there is the potential for abuse of that authority. This is one of many reasons it is important to consult an experienced estate planning attorney before executing documents that grant someone else the authority to act on your behalf. If you have specific questions regarding the use of Powers of Attorney or Living Trusts for you or one of your clients please feel free to contact us directly and we will be happy to answer your questions. 

Matt Ferrara