Many people make big mistakes titling bank and investment accounts. Often advisors and bankers advise customers to “put your child’s name on the account” or to set the account up as a “pay on death” (or “POD”) account. However well-intentioned the advice, the results of either approach to titling an account can be surprising and unpleasant. Good intentions do not constitute good advice.
The Allure of Joint and POD Accounts
Often, the attraction is probate avoidance. Either a joint account with survivorship features or a POD account will pass as a nonprobate asset and avoid the state-mandated probate process.
With respect to joint accounts, the attraction is often convenience. Unlike a POD account, a joint account holder has immediate co-ownership rights, and, thus, immediate access to the account. An older person may feel better knowing that a trusted son or daughter has immediate access to an account “in case something happens.”
The Dangers of Joint and POD Accounts
If the POD or joint account payee is a child with disabilities, the result could be terrible for the child upon the parent’s death because the receipt of the account could jeopardize continuing qualification for public benefits such as Medicaid or SSI (to the extent those programs are relevant).
The co-owner child now owns the account as much as the parent. What if the child is sued? What if the child goes through a messy divorce? Or what if the IRS takes a keen interest in the child’s affairs? Those events happen to the best of children; nevertheless, in those cases the joint account will be deemed to be owned by the child.
Another problem is that the co-owner/child’s siblings may be “out of luck.” This happens all the time. For example, Mom wanted the kids to share equally, but after Mom is gone Sis suddenly “recalls” that Mom wanted her to have the accounts since she “was the one who always helped Mom.” Because Sis was a co-owner of Mom’s accounts and likely had “survivorship” rights, she owns the accounts now – and there is nothing an attorney can do about it.
A Better Way
If the goal is asset management in the event the owner becomes incapacitated, the best approach is a properly drafted power of attorney.
A “power of attorney” has nothing to do with appointing lawyers. The word “attorney” has its roots in an old French Norman word for “legal substitute”. A “power of attorney” is simply a document signed by someone called the “principal” appointing an “attorney-in-fact” or “agent” to manage some or all of the principal’s financial and business affairs.
The terms of the power of attorney control what the agent may, or may not, do. If the document covers a broad spectrum of duties, then it is a “general” power of attorney. An agent can be given very broad powers, and if that makes the principal nervous the instrument can require the agent to secure some other person’s permission.
It used to be that a power of attorney would lapse when the principal became incapacitated. That did not do any good if what was intended was to cover the situations when the principal did become incapacitated. The law stepped in and provided that a power of attorney could be “durable” (or be valid after the incapacity of the principal). Most powers of attorney now are “durable”.
If the goal is to avoid probate upon the death of the account owner, the likely better approach is a revocable (or living) trust. The assets in the trust will avoid probate. In fact, a revocable trust can also assist in post-incapacity management because a successor trustee named in the trust agreement can step in to handle continuing asset management. The assets in the trust are also protected from the trustee’s personal liabilities (in other words, the trust assets are not exposed to the trustee’s own problems with creditors).
Finally, all of the above considerations especially apply if there is a child with disabilities. There will rarely, if ever, be an appropriate time to name a child with disabilities as the co-owner of a joint account or the beneficiary of a POD account. Carefully consider a special needs trust, either under a will or as part of a revocable trust, to hold that child’s intended inheritance. Properly drafted, the special needs trust assets will not jeopardize the child’s continuing eligibility for various public benefits.
Here’s the point: Do not put the kids on the accounts as a joint owner. Instead, execute a power of attorney that grants the sorts of powers to the kids you are comfortable with to take over business affairs when, and if, they need to. Alternatively, consider a revocable trust. In the meantime, keep the accounts in your name.
Finally, Never Say Never . . .
Now that I have you all excited, you might need to relax.
The practice I have just disparaged might not be so bad in the case of an only child, or if Mom is absolutely certain that she wants child to have the account to the exclusion of the other siblings. But in that event, Mom should still be sure that the child, whose name is on the account, is not going to end up losing the account to creditors because the child’s name is on the account as an owner.
The downside to the advice given here: Some fees to a lawyer. There is, however, an upside: You may avoid a real mess.