“Putting my child’s name on an asset avoids probate”
This is how the conversation usually goes: “someone told me if I put my child’s name on my bank account, upon my death it goes to that child and I avoid probate.”
This particular myth is a real “land mine” waiting for an unsuspecting person to step on. Some assets do pass by title and by operation of law, most notably bank accounts and real estate, and therefore escape the need for using a Will or trust to transfer to the surviving joint tenants, at least until the death of the last surviving tenant on the asset. After all, your estate is going to them after you die anyway, right?
First, if you add a child as a joint tenant on your account or home, you have potentially made a taxable gift to that child. If gift tax is to be paid, it is the donor who pays it, not the recipient.
The bigger issue is your child is now on title with you. This means that your home (or other joint account) is now exposed to what might go wrong in the life of that child. What happens to your home if your child declares bankruptcy, and is listed as an owner on your home? Maybe it’s not a bankruptcy, but an auto accident where your child is “at fault”, and the resulting settlement exceeds the liability limits of your child’s auto insurance. Might your home or other assets potentially be at risk due to the joint tenancy title arrangement? The answer is yes.
Notwithstanding the liability issues discussed above, your child is under no legal obligation to share this distribution with the other children, and could simply keep the entire balance of the joint tenancy property. No one would ever do that, would they? I leave the reader to answer that question.
In conclusion, before you think of using Joint Tenancy as the “simple” or “easy” way to avoid the need for a formal estate plan, consider some of the issues just covered. Is that something you are willing to risk, just to avoid drafting or revising a Will or trust?
(This is the first in a series of estate planning misunderstandings.)
The fact is, if you are an adult, you already have an estate plan. We all do. It was drafted on our behalf by the legislatures of the state in which we reside, and is governed by the state laws of intestacy. If you die “intestate”, meaning without a Will or a trust, these laws govern who will inherit your assets. If you have minor children, these laws also govern who will be chosen to be their guardian and the trustee of their inheritance until they reach the age of 18. It will also give your children complete and unfettered access to their inheritance upon reaching that age. Might it be harmful to an 18-year-old to have unrestricted access to any significant sum of money? As you might imagine, the state laws of intestacy might not arrive at the same choices that you would make.
It may also mean that your family may also have to endure a lengthy, public and possibly costly probate in order to administer the estate. Additionally, all of the proceedings and the choices made by the probate court will be public record, open to review for anyone who cares to.
If instead you may want to take control and create your own plan, one that reflects your choices and your wishes. Then regardless of your net worth or age, estate planning in some context is appropriate for you. It may involve little more than drafting a Will to distribute your assets according to your wishes, and appointing a guardian in the Will for any minor children, along with Powers of Attorney for Health Care and for Finance (two separate documents).
Kevin P. McFadden, Knollmiller & Arenofsky, LLP
Special thanks to attorney Robin C. Bevier from Northern California where I shamelessly relied upon his excellent article.
Conservatorship is a court proceeding where an individual is considered by a judge to be unable to manage their own financial affairs so another person or entity is named to handle it for them. There are many reasons why a conservatorship may be needed; disability, dementia, youth, incapacity, and more.
The process can be costly, requires an annual accounting, court hearings, and in some unfortunate instances completely uses up the entire estate of the person it was intending to protect.
Powers of attorney work in some instances but have proven to not be a guaranteed solution. For example, title companies will not accept a power of attorney to sell real estate unless the document specifically mentions the power to sell the very property in question. Another example are IRAs. Normally the brokerage firm will not permit an agent under a power of attorney to exercise some powers unless the power of attorney specifically states retirement accounts AND lists that the agent can do the very thing it is trying to accomplish. The final example of a power of attorney problem is the age of the document. Sometimes a company will not accept an older power of attorney even though the statutes say the documents do not expire.
The other tool to deal with conservatorship is a trust. By placing assets in the name of the trust, the person has more assurance that if down the road they become unable to manage their own financial affairs, the next successor trustee can act on behalf of the assets. For example, let’s say I I own a piece of black acre and place it in my trust. Years down the road I develop dementia. My successor trustee that I named in my trust can sell my share of black acre, rent it, or handle it as if I were able to act on my own behalf. No power of attorney is needed.
If you have any questions about conservatorships, please give us a call at 480-345-0444.
Kevin P. McFadden, Attorney at Knollmiller & Arenofsky, LLP
The “typical” client 20 years ago was very concerned about ending up in probate after their passing. I am not sure if this came from all the advertised estate planning seminars that used this to scare people into living trusts, or more accurately stated, buying their financial products. Probate is certainly still a concern for many clients, which in this writer’s opinion isn’t the terrible process it is made out to be. The bigger concern now is a client’s possible dementia or incapacity in later years.
This is certainly an advantage of a trust over a will. The assets held in trust and an excellent power of attorney for the day to day financial matters are a great way to take care of each individual in later years. If one happens to be unable to care for their own self, their successor trustee and agent under the power of attorney can almost always take care of all their financial matters without court action, conservatorship or governmental involvement.