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Joint Accounts are no Substitute for Quality Estate Planning – Part 2

How does joint tenancy avoid probate?

Let’s use a simple example: the family home. When an aging widow places her home in joint tenancy with an adult daughter, they both immediately are entitled to possession and ownership. Each has the same rights. If the property is rented, each is entitled to the entire rent equally. Therefore, the law generally considers the widow’s action as a gift to her daughter. Likewise, upon the widow’s death, the house is immediately the sole possession of the daughter and not part of the probate estate. In other words, it passes outside of probate.

So what is wrong with joint tenancy?

Well, the example above sounds terrific if you are the daughter. However, what if there are four other adult children. Often, rather than executing a carefully planned will or trust, an elderly person will be advised to simple put the house in joint tenancy and instruct the joint tenant to sell it and split the money with her siblings. As one can likely detect, there is a huge potential for abuse here. What if the daughter gets greedy and does not want to share? There is no probate court to make her do what her mother asked. And even if siblings brought her to court in a lawsuit, unless the mother was incompetent at the time she set up joint tenancy, the court will honor her wishes and allow the daughter to keep it all. There are, in fact, many tragic examples of joint accounts gone wrong.

Similarly, people often do the same thing with bank accounts, placing large sums of money in jointly owned CDs, brokerage accounts, and bank accounts. Upon death, the balance belongs solely to the joint tenant, and it can be very difficult to pursue legal actions to distribute the money to other heirs, because just as with the home, the funds passed only to that person. Moreover, because that joint tenant immediately has an undivided 100% interest in the money, he or she can simply go to the bank and remove all the money, even while the widow is still living. So, in the above example, if the widow put all her money in a joint account with her daughter, that daughter could go to the bank and remove all of it the next day and claim it was a gift. If the widow wants it back, she will almost certainly have to sue her daughter and convince a court that she did not intend a gift to one daughter to the exclusion of the other children. This can be an uphill battle, and the litigation is very costly. Even worse, it tears families apart and pits siblings against each other in ways that can be far worse than simply probating a will.

There are sensible alternatives to joint tenancy

A far more sensible approach than joint tenancy or joint bank accounts is to meet with an experienced estate-planning attorney, and after considering all the pros and cons, lay out a workable plan that protects children, reduces taxes, and preserves assets. This may include a combination of wills, trusts, detailed powers of attorney, and yes, even joint tenancy. There are also “payable on death” or “transfer on death” accounts, which allow the owner to retain sole possession during life and pass to someone else only upon death. Likewise, some states permit “convenience accounts,” which are joint accounts designed solely for the owner’s use and convenience, yet they allow someone else to have access. Further, simple powers of attorney can be a great tool as well. They create a fiduciary relationship that legally requires the agent to handle the assets properly but does not give the agent all the money.

While there can be good reasons for setting up joint accounts, they rarely make for a good alternative to comprehensive analysis of an estate planning attorney and a sound, well-informed estate plan.

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