A recent article on the MarketWatch website illustrated a serious risk that can occur when parents need help paying bills. A woman’s father told her he had made her sister a signatory on his bank account so the sister could help him pay his bills. He also stated that after the bills were paid and he had passed on, the rest would be split evenly between the two sisters. Soon after he died suddenly, and without a Will. At that point the woman discovered her father had made her sister a joint owner on the bank account. The money in the account passed to her sister. And guess what: her sister kept it all.
The article goes on to discuss Wills and their issues, but in fact a Will would not have solved anything in this situation. If the father had left a Will, would anything have been different? Answer: No. When you make another person a joint owner of your bank account, and you pass on, the surviving owner immediately owns the entire account. The account is not part of your estate (although the IRS may include it for tax purposes).
The MarketWatch article does not discuss what the father might have done to assure his wishes were carried out. If he needed help paying his bills, but he wanted his net estate to be divided between his children, a properly-drafted Power of Attorney would have solved the problem.
If the father had executed a Power of Attorney (“POA”), he would have enabled the “helper daughter” to write checks out of the account, without unwittingly leaving her the entire balance in the account upon his death. Once he passed away, the ability of the “helper daughter” to write checks out of the account would have immediately ceased, and she would have had no further access to the money in the account. The account would have been part of his estate.
Even if you have only one child, who will do the right thing, a POA may not be the total solution. Assets in your name are subject to claims from creditors, and can prevent you from obtaining government benefits if you need long-term care. The father in this case could have contemplated setting up a Trust.
Trusts are an extremely useful way to safeguard your money when you are getting older and nearing the point when you are likely to need long-term care. They do this by shielding your assets from creditors. If, in the case above, someone sued the father or the “helper daughter” for any reason, the money in the joint account would be at risk. In addition, if the “helper daughter” got divorced, the account would be at risk in any divorce settlement. This would not be the case if the father had established a Trust. This is because the assets would now be owned by the Trust, and not by the father or the daughter.
In addition, if most or all of the father’s assets were in a trust, the administration of his estate would be vastly simplified. Trust assets pass to beneficiaries much more efficiently than they can with a Will. They are outside the person’s estate, because they are no longer in his (or her) name, so they can be distributed as the trust specifies without the need to undergo a judicial process.
The bottom line is, once an older person begins needing help, it can be crucial to the person’s long term well-being – and to making sure their wishes are carried out the way they envision – to have a plan for how to manage their finances and protect against the need for long-term care. If that older person is you, or if you are the child of someone who needs or will soon need help, it will literally pay you many times over to educate yourself, and to take action to set up a plan. Advance planning can protect your assets, and it also can do double-duty as effective estate planning. Lamson & Cutner’s website is designed specifically to educate you about your options. We encourage you to find out more by visiting it.