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.

Estate Planning for College

As we guide our clients through the planning process we watch for other opportunities where we can assist them and give them more peace of mind. One opportunity that frequently arises involves reassuring parents with college aged children that if something happens to their child while away at school they will still have the ability to assist their child.

     Often a strong motivation for people to have an estate plan is concern for what will happen to their children in the event of their death. These clients focus on providing structured distributions over the children’s lifetimes to ensure that there are sufficient assets to help their children along the way. They also pay special attention to whom they name as Guardians for their children, often naming three or more potential Guardians so they are assured that their children are raised in a loving home. But for as much time as these clients spend planning for their minor children, as those children grow older their parents forget one very important piece of the plan.

     Parents take for granted that they will be able to care for and assist their children throughout their lives. However, frequently parents forget that once a child reaches the age of eighteen, that child is an adult in the eyes of the law, entitled to make their own decisions, and protected by all the laws and rules that exist to keep information private and ensure proper care. Thankfully the parents already know, though frequently forget, about a tool that can allow them to continue to care for their now young adult child if that child is injured or falls ill. 

     As part of their own planning, parents executed Durable Powers of Attorney and Patient Advocate Designations, naming those individuals they wanted to make their decisions if they were unable to make decisions for themselves. By encouraging children to execute the same documents, after those children turn eighteen, parents will have the authority to make legal and medical decisions for their children. This way, no parent would race across the state or country after learning that their child needed assistance only to discover that doctors, bank, landlords, and more refuse to take instructions from the parent.

     In addition to providing a layer of added protection for children, beginning the estate planning process shortly after turning eighteen also has two other benefits. First, those children have now been introduced to the attorney who did their parent’s planning and have some idea of what is involved in estate planning. No longer are the Will and Trust mysterious documents known only from pop culture references. It also demystifies attorneys in general so that in the event that the now young adult encounters a situation where they need legal counsel they have a person they know they can call. 

     The second benefit arises because by starting to plan early in their adult lives these children begin to build a habit of planning. As they get older and begin to accumulate wealth of their own we work with them to put together their own Will and possibly a Trust. We can recommend that they begin working with a financial planner early in their life so they establish good habits and avoid falling prey to pitfalls that hamstring people without these resources.

     The process of putting together Powers of Attorney and Patient Advocate Designations is not onerous or time consuming. Most of the time we can handle the entire matter in a single meeting lasting only about an hour. At the end of that time, your child has been introduced to a number of valuable adult experiences and you have the peace of mind that you will be able to continue to look out for them while they grow into the strong, independent, successful adults you know they can be.