Bank accounts are often a source of dispute after someone dies. How you fill out the account opening forms and whose name you put on the account will determine who owns the account after you die.
It is quite common for someone to think they have opened an account in their name alone – which they expect will pass to the beneficiaries named in their will – when the person has actually named a joint owner or a payable on death designee. The outcome is that the surviving joint owner or payable on death designee receives the monies when the person dies, while the beneficiaries in the will receive nothing.
This simple mistake is sometimes the result of the person’s misunderstanding of what assets are probate assets that pass under their will and what assets will be paid outright to a named beneficiary or surviving joint owner. In some cases, it is due to the bank’s form that was filled out incorrectly, often with the assistance of a bank employee who was not properly trained in the different types of account ownership. In either event, it can lead to the person’s intentions being thwarted and litigation after the person dies.
Here are five things you need to know about protecting your bank account assets.
• Know the legal consequences of naming a payable on death designee of an account. One of the biggest sources of confusion I see are people who name a payable on death designee because the bank representative tells them it will be easier and avoid probate. However, the person still thinks the assets will pass into their will or trust when they die. That will not happen. If you name a person as a payable on death designee, they will receive the asset when you die. The people you named in your will and trust will not receive it. For this reason, you should make sure your estate planning attorney is aware of any change you make to the ownership or beneficiary designations of your accounts. Often a small change can have a big impact on your estate plan.
• Watch out if naming a joint owner for convenience purposes. Problems frequently occur as people age and they need assistance in managing their accounts. Consider this very typical scenario. An aging mother had a $1 million brokerage account in her name alone and her will left all her assets to her three children equally. When the mother’s health started to decline, she put her daughter on the account as a joint owner to help manage the account. After mom died, the sister claimed the account was 100% hers alone as the surviving joint owner. Technically, the sister was correct. However, in some states there is an exception in the law for accounts that were joint for convenience purposes only. In this situation, the burden was on the sister to prove that the account was not joint for convenience purposes and that mom intended for the daughter to own it after her mom’s death.
• Joint owners can clear out the account. If you name a joint account owner, they have access to the monies and can clear out the account before you die. For example, a father had a bank account with $300,000, and in his will left the bank account to his two children from his first marriage. In the months leading up to this death, he added his second wife as a joint owner of the account. Before his death, the second wife cleaned out the account and claimed the monies were 100% hers as the joint owner.
• Consider modifying the language in your will. If you do intend to name a joint owner of an account for convenience purpose only, speak with your lawyer about whether you should modify your will to state that the account ownership is joint for convenience purposes only. This additional language will clarify your intention that the account pass to the beneficiaries named in your will. Another approach is to modify your will to say that any amount a beneficiary is due to receive will be reduced by any joint assets he receives. Of course, this approach only works if you have sufficient assets in your estate to cover the set-off.
• Speak to your lawyer about a trust. If you want to create a trust account, speak to your lawyer and draft a proper trust. Do not rely on the bank’s account opening forms to create what you think is a trust. Some banks will allow you to open an account in trust for a named beneficiary. This is called a “Totten trust.” It is essentially the same as a payable on death designation. However, some people think they are creating an actual trust. I have had multiple clients tell me that they created a trust at their bank when they had just named a payable on death designation.
How you designate ownership of a bank account can greatly affect your estate plan. Make sure your lawyer is aware of the ownership and beneficiary designations of your bank accounts and any change you make to them.