Author: Attorney Stephen L. Mangan, Principal.
During the process of setting up a Last Will and Testament, questions arise about how to handle bank accounts. People become concerned and ask, “What will happen if I’m unable to handle my affairs on my own?” They also want to know “What happens to the funds in my bank account when I pass?”
The answers to these questions depend on many things. One of the most important things to consider is the way that existing estate planning documents answer the questions. In this article, we will explore the possibilities and consequences of decisions and that will help you plan for the best outcome according to your final wishes.
Estate Planning is Not One Size Fits All
As with anything else, there is no one answer that is superior to all others, when it comes to planning your estate or drafting your Last Will. It depends on your wishes, your family situation, your level of comfort and trust in allowing others to have access to your accounts, and your estate planning documents.
Bank accounts can be established in one or more names. An account with two names is usually a joint bank account. This means that ownership is shared among the persons named on the account. Each owner has access to the account and access to the funds in it regardless of who deposited the funds. The most common situation is that of married persons. When a joint account is opened, the bank generally takes the social security number of one owner. That number is used for reporting interest income to the IRS. This does not mean that the person whose number is used has more rights to the account than the other owner(s).
In a joint account, when one owner dies, the surviving owner(s) own the amount on deposit. Therefore, a surviving owner should not rush and close the account, because they could be responsible to repay funds that they were not entitled to. For example, there might be a recent deposit in the name of the deceased owner subject to be reclaimed by the paying source, such as a retirement check, social security payment, or the like.
Understanding Beneficiary Designations
Creating a joint account allows all of the named parties on the account to have full ownership of the account. That is substantially different from a situation where a sole owner adds the name of a person as power of attorney (POA) to their account. A legal POA is one who has been named in a document executed by a person in favor of someone else. A general power can give complete authority to someone to act in their place. That power can be general or limited in some cases.
A person who has been given the power (sometimes referred to as an “attorney-in-fact”) has access to the account, but not ownership. In that case, the original owner did not divest his ownership interest to the POA. In essence, both the owner and the POA have access to the account. A POA has a fiduciary duty (a legal duty) to act within the bounds of the law and according to the terms of the POA document. The laws related to fiduciary duty mandate that the POA act in the best interest of the person who granted that power and not act to personally benefit themselves. An example of violating fiduciary duty would be a POA who pays his or her own bills with funds from the account or makes gifts to himself.
An account owner can establish a “payable on death” (POD) or “transfer on death” (TOD) designation. The terms are interchangeable. This designation gives a person absolutely no rights to access the account while the principal owner is alive. Essentially, they are the beneficiary of that account. The funds are distributed exactly as the title states: “payable on death.” There can be one or more persons designated as POD or TOD beneficiary on an account.
Therefore, when a sole owner of an account with a POD or TOD designation dies, the person designated as that beneficiary can present proof of death (a death certificate) to the bank, along with proper I.D., and receive the funds in that account. The bank account designated in that fashion is included in the decedent’s estate. However, ownership automatically passes to the named TOD or POD beneficiary without any order of probate. No probate order is needed to access the funds on account.
Seeking Sound Advice
Problems develop when people take the advice of family and friends when setting up an arrangement to handle their affairs while living. People are often ill-advised to “get their name on the account.” When deciding what type of arrangement is best, the first thing to look at is the person’s estate planning documents, if any. A person who has signed a Will has probably been advised to establish a POA and Advance Directives. Those documents usually name a fiduciary who was selected because the signer of the documents knew and trusted them, or they were also named as heirs and beneficiaries in the Will. Therefore, it is a good course of action to select those same beneficiaries named in the Will as the ones being considered for addition to a bank account as an owner or POA.
A carefully drafted Will or Trust could be permanently disrupted and rendered void if the naming of owners on a bank account or investment is done without careful consideration. Consider this example of Fred’s Last Will, which specifies that the Executor of the Estate must divide it equally among five beneficiaries. However, during his life, Fred set up a bank account and adds a cousin, who is not one of those five beneficiaries named in the Will, as a joint owner. In this case, when Fred dies, as it relates to that joint account, the Last Will would be meaningless, because the ownership of the account was held jointly between Fred and his cousin. The five beneficiaries of a Last Will would have no rights access to that bank account. The cousin, as surviving owner, would receive all funds in that bank account.
A better alternative is to add a POA to a bank account. That designation gives them lifetime access, but no ownership. Thus, when the account owner dies, the account becomes an asset of the Estate. It would not be owned by the POA, because the POA was added for lifetime access not ownership of the account. If Fred set it up that way, the funds from that bank account would be divided five ways, in accordance with his final wishes in his Will.
Establishing a bank account or changing the names on an account should be considered very carefully. It is important to have a thorough understanding of a person’s estate plan, the status of all of their accounts, who is handling their affairs now and in the future. All of these parts must work together to ensure that one’s final wishes are recorded and enforced upon death.
The advice of well-meaning individuals could result in money being distributed in conflict with the decedent’s wishes or time spent in court hearings to unravel the mistakes that were made. One can avoid these difficulties and carry out one’s final wishes by seeking the sound guidance of an experienced Estate attorney proactively.
You can count on Ericson, Scalise & Mangan, PC to provide you with sound guidance and experience in these uncertain times. For assistance with your legal needs, please contact us today at (860) 229-0369, or email us at firstname.lastname@example.org.