Estate Planning with Joint Bank Accounts – Beware!

A lot of estate planning clients I meet with have enough of a working knowledge of estate planning to know that they want to “avoid probate.”  They’ve also heard that joint accounts can accomplish this goal. They are correct in theory, but the devil is in the details.

There are several major pitfalls that one can encounter with joint accounts that will make one think twice about utilizing joint accounts alone to avoid probate.  There are other better options available to avoid probate and also avoid those dangerous pitfalls.

First a short primer on probate.  Probate is the legal process whereby a court (called the Surrogate’s Court in New York) must approve or validate a Last Will and Testament.  The process can be rather lengthy and expensive.  It can cause delay and hassel for beneficiaries or family members charged with the responsibility of handling the decedent’s affairs.

Only assets that fall under the control of the Last Will must be probated.  Only assets in a decedent’s sole name fall under the Last Will.  In other words, to avoid probate, it is key that the decedent not have any assets in his or her sole name upon his or her death.  Enter: “joint bank accounts.”  Since they are not in the decedent’s sole name, they don’t pass through probate.  Rather, they pass automatically to the surviving joint tenant.

Now, what are some of the pitfalls of this type of arrangement?

  1. The first is that people try to do double duty with joint bank accounts.  They use them to avoid probate, which is fine.  But they also use the joint bank account to accomplish distribution goals.   For example, mom has several children, but she only puts one child on the joint bank account.  Child 1 promises mom that he will distribute the money amongst his siblings when mom dies.  (If this always happened as planned, litigation attorneys wouldn’t have a job.)  Child 1 may decide, and has the legal right to decide, NOT to distribute the joint bank account to his siblings.  As the joint owner, he has legal title to the full proceeds upon mom’s death.  The other children are left out in the cold or knocking on the door of an expensive litigation attorney.
  2. The second pitfall is again using the joint bank account for double duty: avoiding probate and being a fund available for payment of debts and funeral expenses.  As immediately available funds upon death, they could be seen as an ideal source of funds for these immediate expenses.  A family could have to wait months to push the Will through probate to get authority to utilize estate funds for funeral, etc.  The same problem, however, lies in wait.  The surviving joint tenant has no obligation to use the funds for the funeral and would be well within her right to walk away with 100% leaving the parent rolling over in the grave.
  3. A third pitfall of joint bank accounts is that the money is available to the creditors of the joint tenant.  For example, mom puts Child 2 on the joint account, but Child 2 is a spendthrift and uses the funds, or Child 2 has creditors who can access the parent’s funds.  They could all be dissipated before the parent even passes – not an ideal situation.
  4. Even joint accounts between spouses are not foolproof.  The joint account designation certainly avoids probate on the first spouse to die, but does not upon the second spouse.  Moreover, if the spouses die in a simultaneous incident, it is guaranteed that a probate proceeding will be required for at least one.

All of the foregoing pitfalls can be easily avoided through the use of a Revocable Living Trust (“RLT”).  Transferring assets into the RLT will avoid probate as to the assets.  The RLT will also specify the distribution of those assets upon the grantor’s death (avoid problem #1 above).  The RLT will also often allow the successor trustee to use the trust assets to pay funeral expenses, etc. immediately upon the grantor’s death (avoid problem #2).  As a trust, the funds are not available to the grantor’s beneficiary’s creditors (avoid problem #3).  Finally, when reciprocal trusts are used for spouses, the assets can pass outside of probate even in the event of a simultaneous death (avoid problem #4).  The solution is simple, and simple is beautiful.