Joint Accounts - Misconceptions and Unintended Consequences

Oftentimes an older single client, or that client's child, will meet with me and tell me that they have already "done" estate planning or elder law planning because they have "put" one or more of their children on an account - i.e.: created a joint investment account or bank account, or created a joint tenancy in real estate.

There is nothing wrong with this per se - it just appears that many people are unaware or have misinformation about the consequences of creating "convenience" accounts.

Generally speaking, any joint account that titles the co-owners as "or", or as "joint tentants with rights of survivorship" will pass to the surviving co-owner upon death, regardless of any contrary instruction in any document, such as a Will. Note that a joint account that titles the co-owners as "and", or as "tenants in common" will not pass to the surviving co-owner on death; instead, one-half (or some other designated amount of the property) will pass under the decedent's Will, and the co-owner will keep his other part of the property.

Problem 1 - A Joint Account Contravenes a Person's Intentions in their Will. For example, Mom's Will leaves all her assets to Son and Daughter jointly. However, Son lives closer, so Mom adds Son to a joint account "just in case something happens". Mom dies. The joint account comprises 80% of Mom's estate - so Son gets 90% of the estate and Daughter 10% of the estate. Son and Daughter end up in court arguing whether or not Mom, by creating the joint account, intended for Son to have 90% of the estate, or if her intent was for the estate to be divided 50/50, as set forth in the Will. The family members never speak again, and the only ones who win are the lawyers. The sad result of this (true) example is that a "convenience" account ended up being anything but.

Problem 2 - Child Joint Owner has Creditor/Divorce Issues. Once again, Mom and Son have a joint account and the account comprises 80% of Mom's estate. Son owns a business that takes a turn for the worse, or gets a divorce. Son is deemed to own some or all of the joint account (depending on whether he is subject to civil litigation, bankruptcy or divorce), as his name is on the title. Mom probably didn't intend for son to "own" the account now; all she really wanted was for Son to be able to write checks if she got sick in the future. Instead, Mom faces the real possibility of losing some or all of her main asset due to the credit problems of Son. Does Mom have some defenses? sure. But better to avoid the situation altogether.

Problem 4 - Mistaken Belief a Gift Has Been Made and asset removed from Taxable Estate. In the above scenarios, the problems arose because Son was deemed to have an ownership interest in the account. Change the facts so that by adding Son to the joint account Mom intends to make a gift of 1/2 of the account to Son, thereby reducing her taxable estate. However, in completing an estate tax return, Mom will be deemed to have retained an interest in 100% of the account (as she, as a co-owner, may withdraw 100% of the account), unless Son can prove he contributed money to the account. Son here will get no credit from an estate tax perspective for merely being named as a co-owner on a joint account without making a contribution.

Problem 3 - Mistaken Belief Asset have been "Transferred" for Medicaid Purposes. If you are trying to qualify for Medicaid, merely creating a joint surivorship (or "or") account with Son does not get any of the account out of Mom's name. Here, Mom names Son as joint owner with rights of survivorship. By doing this, Mom and Son believe she has made a gift of 1/2 of the asset to Son, so that she no longer owns it for Medicaid purposes. However, Medicaid will deem 100% of the asset to belong to Mom, unless Son can prove he contributed money to the account or assets.

Solutions? The easiest solution for most of these cases is for Mom to have created a General Durable Power of Attorney naming one or more of her children to act in a fiduciary capacity on her behalf if needed during her lifetime, and a Will or Revocable Trust to transfer her property upon death. The General Durable Power of Attorney should allow the attorney-in-fact to make gifts in accordance with Mom's existing estate plan.

Alternatively, be sure to keep the "convenience" account small, and be aware of the fact that creating a joint account may create more consequences then you intend.