By Ben A. Neiburger, Attorney, Generation Law
Property ownership is a fundamental aspect of estate planning and asset management. This ownership comes in many forms: individually, with someone else (called joint tenancy), in trust, and with some type of contractual beneficiary.
Different ownership forms each provide distinct asset control mechanisms for the disabled. Different methods exist for transferring ownership upon death. Each of these have different advantages and disadvantages. In this article we we cover the basics briefly and then highlight some surprising issues our clients have experienced with jointly owned financial accounts.
Individual Ownership
When property is owned individually, the owner has complete control over the asset and can decide its use, sale, or transfer. However, this ownership type can pose challenges if the owner becomes incapacitated, as no one may be authorized to manage the property for them. In such cases, establishing a property (financial) power of attorney or a living trust ensures the property is managed according to the owner’s wishes. In addition, if someone dies with an individual asset not held in any other form (such as jointly with someone else, in trust, or with a beneficiary), the asset transfers through the probate process.
Joint Ownership
Joint ownership, on the other hand, involves two or more individuals sharing ownership of the property. This can be beneficial in terms of shared responsibility and ease of transfer upon death, as the property passes to the surviving owner(s) with no probate. However, joint ownership can also lead to complications, such as disagreements between co-owners, issues with creditors, and challenges using powers of attorney. It’s important to consider the implications of joint ownership and to have clear agreements in place to manage potential conflicts. We discuss this further below.
Trusts
Trusts offer significant benefits to individuals with disabilities or complex estate planning needs. A trust allows the owner to transfer property to a trustee, who manages the asset for the benefit of the designated beneficiaries. One can tailor trusts to meet specific needs, such as providing for a disabled family member or ensuring that assets are distributed according to the owner’s wishes. Trusts can also offer tax advantages and protection from creditors, making them a valuable tool in estate planning. Assets that transfer by trust avoid the probate process.
Financial Accounts That Contain Contractual Beneficiary Designations
Financial accounts, such as life insurance policies or retirement plans, often use contractual beneficiaries. Some other financial accounts use beneficiaries in the form of “pay on death” or “transfer on death” accounts. This form of ownership allows the owner to designate a beneficiary who will receive the asset upon their death. Contractual beneficiaries can streamline the transfer process and ensure the asset reaches the intended recipient without probate. However, it’s important to review and update beneficiary designations regularly to reflect changes in circumstances, such as marriage, divorce, or the birth of a child. You cannot control what happens to an asset after death if it transfers through a beneficiary designation. So, don’t appoint a minor or someone with creditor problems as a direct beneficiary of an account. In addition, if you are going to have estate administration expenses after you die (such as funeral, payment of expenses, money to fix up the house), please don’t leave all of your assets to others by beneficiary designations because it requires all the beneficiaries to pitch in with the expenses out of their inheritances — but this isn’t a legal requirement. We have had many estates where some of the beneficiaries refused to contribute towards the shared expenses leaving the “responsible child” to pay those expenses on his or her own. Don’t do that to people you love just because its easier for you to fill out a beneficiary form instead of paying a professional to do it correctly.
Problems with Jointly Owned Financial Accounts
Most people think the most simple planning technique is to hold assets joint with another, since it permits the other person access to the asset and it transfers automatically upon death. While this is true, most people are not aware of some huge downsides to using joint tenancy to manage assets during disability and at death, especially when the joint tenant is not the spouse. (It’s usually appropriate to have your spouse on an account jointly with you.)
All joint owners must authorize any changes to the joint account — adding additional joint tenants, removing a joint tenant, and even using a power of attorney for a mentally disabled joint tenant.
For example, in one case, we had a joint account between mother and someone whom I’ll refer to as “bad daughter.” Mother became incapacitated. Bad daughter became belligerent when our client, the “good daughter,” needed to pay some of her mother’s healthcare expenses. The bank would not let her use her mother’s perfectly valid and legal power of attorney on the joint account without the consent of bad daughter. We believe this was a policy of the bank that holds the account (I recently confirmed with my own bank that this is a policy they sometimes enforce too). To get past this issue, the good daughter hired our office to advocate with the bank’s legal department to find a solution to exercise control of assets in the joint account to pay mother’s bills. While we eventually used the power of attorney to withdraw the money from the account and set up new accounts using the power of attorney, the joint account was problematic because of the belligerent joint tenant. Thousands of dollars in legal fees problematic . . .
Challenges Closing Joint Accounts: If you need to close a joint account, or take someone’s name off the joint account, you need the consent of both holders of the account. When you are managing things without a power of attorney, this can create problems. If you have a non-cooperative joint tenant, this can prevent account closure.
The Joint Tenant May Empty the Account: Also, with a joint account, each joint tenant may take all the money out of the account. Therefore, if you have a child on the accounts, and the child goes rogue, that child can pull all the money out of the account and the other joint tenant cannot stop this.
Assets in the Account May be Considered Assets of a Joint Tenant Even If the Joint Tenant is on the Account for Convenience: If a joint tenant faces a court judgment, the creditor might attempt to collect from their interest in the account. A divorce may also classify (sometimes wrongly) the account as an asset. Medicaid will consider the entire account to be the funds of the Medicaid applicant.
In another anecdotal horror story, a gentleman we shall call Jack had parents who divorced after many years of marriage. It was a bad divorce, and a lot of anger. Jack was added as a joint owner to his father’s account in order to help him with his finances. A few years later, Jack’s mother made a string of terrible financial decisions, and Jack offered to help her as well, and was added as a joint owner to her account as well. Jack’s mother made more terrible decisions and ended up in debt that she could not pay. The bank ended up taking money out of Jack’s father’s account (even though the parents had no contact and no shared financials) because Jack was the joint owner on both accounts. There was a lot more to it, but the vastly simplified version is that the mom’s debt was seen as Jack’s, and the father’s assets were also seen as Jack’s – and thus used to pay them off. It was a nightmare to try to rectify. In addition, there was no legal representation during the process, so the bank may have acted wrongly (this was an anecdotal story, so we do not know all of the facts).
So, for disability management and putting somebody on an account, sometimes it’s better for them to be an authorized signatory on the account instead of a joint owner. You can appoint someone as the beneficiary of the account if you still want the account to transfer outside of the probate process and you are not using trust estate planning.
