How Helping Mom with the Bills can Derail an Entire Estate Plan

When clients make decisions regarding access to their financial accounts, they often do so for their own ease or convenience. It is important to review the ownership of bank and investment accounts to ensure that a decision made in the name of simplicity does not result in unintended consequences.

     Often older clients have their children assist  them with regular financial activities, like shopping, paying bills, or banking and investment activities. For simplicity, the client adds that child as a co-owner of the client’s bank and/or investment accounts. While in some cases this is not a major issue, co-owning an account with a child can unintentionally skew the client’s distribution to family members under their intended estate plan. 

     When a person dies, assets that they own individually must pass through probate to name the beneficiaries, and assets owned by a client's Living Trust pass pursuant to the terms of the Trust. However, when a client co-owns an account with a child and the child survives the parent, the child becomes the sole owner of the account. Assets that the client intended to pass to a number of different beneficiaries are the property of a single person and not subject to the terms of the Probate Court, Will, or Trust. If a client with three children intends to divide assets equally between those children, but co-owns a checking account and an investment account with one of those children then the other two children stand to inherit substantially less than their parent intended (or possibly be disinherited entirely). 

     Co-ownership during the client’s lifetime may also become a  problem because even though  the client and their child know the child is only an owner to help their parent, creditors do not want to see that distinction. An expensive legal battle may occur to protect the assets from creditors of the children. Additionally, when the client names a child as the co-owner, that child has total access to the bank or investment account. We hope that the child can be trusted, but we have seen a number of situations where the child has used the parent's funds for their own purposes, whether because they have alcohol or drug dependencies or simply are unable to control their own spending impulses. In these situations, not only do the eventual beneficiaries suffer, but also the parent can suffer financial ruin when they otherwise would have been financially comfortable.

     Thankfully, it is easy to avoid at least some of these problems. If the child is trustworthy, the  easiest way is to make the child a signatory on an account without making them a co-owner. The downside to this option is that many institutions do not allow this option. Instead, the parent can execute an immediate power of attorney, allowing the child to act on their behalf with respect to financial decisions. If the client has a Trust, the client can name the child an immediate co-Trustee of the parent’s Living Trust, giving powers to assist the client. These options allow the child legally to  act on their parent’s behalf without unintentionally changing the distribution plan at death or worrying about a child's creditors.

     We realize that for many of our clients the distinction between a child signing a check as the co-owner of an account rather than acting under the terms of a Power of Attorney is unclear and seems overly complicated, which is why education is such an important part of our job as attorneys and counselors. We must make sure that both our clients and their children understand that the risks of co-ownership outweigh any convenience they believe exists and that the alternatives, acting under a Power of Attorney or having a Trust with the child as an immediate co-Trustee are safer and no more difficult. 

     It is attention to details such as these that demonstrate to our clients that estate planning is more than simply drafting documents.  We must be aware of the clients’ assets and counsel them as to the appropriate ownership of the assets, given their situation. While coownership of an asset with the child may be appropriate in certain situations, clients should not enter into it until they understand the consequences of that action.