Tim Stephenson, Executive Director of the Legacy Foundation at Shell Point Retirement Community asked me a pointed question the other day, “Who do I disinherit this month?”

You see, some Shell Point residents use the Legacy Foundation’s office as a bill paying service, particularly when they fall ill and can’t manage their own checkbooks any longer. By granting Mr. Stephenson a limited Durable Power of Attorney to pay everyday expenses from a checking account, or to move savings into checking to pay the bills, the residents can be assured that this obligation doesn’t fall on loved ones many miles away.

The problem that Mr. Stephenson confronts, however, is when a resident puts his savings accounts, Certificates of Deposit or other liquid funds into “Pay on Death” or “Transfer on Death” accounts.  Mr. Stephenson described one such resident who had a variety of accounts, all naming different relatives and beneficiaries as the ultimate payee on death.

So when the resident’s expenses require Mr. Stephenson to transfer amounts from the Pay on Death accounts into the checking account, his choice as to which account to withdraw the money from will have an economic effect on the ultimate beneficiaries of the now incapacitated resident’s heirs.

“I don’t want to make those decisions, so I may have to step away from bill paying activities for those residents who have their funds in Pay on Death accounts,” Mr. Stephenson relayed to me.

Walk into any bank branch and ask a teller how you should title your Certificate of Deposit or Savings account to avoid a guardianship or probate, and it is common for them to suggest placing the account into joint ownership with rights of survivorship or to use a “Pay on Death” or “Transfer on Death” account title. As Mr. Stephenson’s dilemma illustrates, there are a variety of problems with these types of accounts, including other adverse effects these types of accounts create for loved ones or other agents holding a durable power of attorney for the account owner, or the account owner’s personal representative at death.

Another dilemma that we encountered in our office involved a client who put most of her checking, savings and brokerage accounts into joint name with rights of survivorship with one of her daughters. Aside from the fact that the act of placing these accounts into joint ownership resulted in a taxable gift that wasn’t reported, she inadvertently disinherited her other children as her will no longer controlled the disposition of these accounts, instead the payee on death – the joint survivor daughter – would rightfully inherit the accounts.

Assuming that the daughter chose to “do the right thing” and transfer portions to her siblings, the daughter would have risked incurring taxable gifts above the current $12,000 per donee each calendar year limitation in making the transfers to siblings. Further, one-half of the valuable “step-up” in tax cost basis would have been lost because the mother would not be the sole owner of the account upon her death.

The error in establishing the joint accounts was discovered before the client died, but there was another problem. The daughter was in the middle of a divorce, and her divorcing husband claimed that she owned one half of the value of these accounts, which should rightfully be figured when the court determined the amount of alimony due under the divorce proceedings.

The assets of a joint account can also be placed at risk when the joint account holder has other liabilities such as those involved in car accidents, homeowner’s mortgage delinquencies, deficiencies on mortgage foreclosures, business liability lawsuits or declares bankruptcy.

As you can see, then, if you have any material amount of wealth, then joint ownership with children and/or Pay on Death or Transfer on Death accounts are usually not the preferred solutions to avoid bill paying problems in the event of incapacity or to avoid probate at the time of death. Meet with us to discuss viable alternatives.

©2008 Craig R. Hersch .Learn more at www.sbshlaw.com