I see a lot of "do it yourself" (DIY) estate plans come in the door that need serious repairs. I have arrived at the point where I can rattle off the typical mistakes off the top of my head, and I can almost see them coming a mile away. I see these mistakes so often I decided it was time to write some blog posts about them, and I have developed a seminar around them.
Here is DIY estate planning mistake #17: Putting the names of one or more additional persons on your bank and brokerage accounts. This is poor planning for many, many reasons. Here are some of the reasons, in no particular order.
ADVERSE TAX CONSEQUENCES
- When you grant an interest in financial accounts to another person you have made a gift. Gifts have tax consequences. If the value of that interest is greater than $15,000 (the annual gift tax exclusion in 2020), which is highly likely, you have just used up some of your lifetime gift and estate tax unified exclusion AND you have technically incurred the obligation to file a gift tax return. You should not do this without discussing these consequences with an estate planning attorney AND your CPA.
- Lifetime gifts also have adverse income tax consequences for your beneficiaries after you die. You see, if you had waited until you died to transfer the property (e.g. by will or trust), your beneficiaries would have benefited from a step up in basis to date of death value, meaning they could sell the property free and clear of capital gains tax. But by gifting it to them during your lifetime, the basis of the interest in the property that you gifted to them is the same as what your basis was in that interest when you gifted them. If the property has appreciated in value, they will end up having to pay tax on that appreciation when they go to sell the property after you die. That outcome could have been completely avoided with proper estate planning. This does not have any application to bank and savings accounts, but it certainly applies to brokerage accounts, which can and do often appreciate in value.
EXPOSURE TO OTHER'S CREDITORS AND DIVORCING SPOUSES
- But wait, there's more! Adding* people to your accounts exposes your accounts to THEIR creditors. In other words, if your child or friend is sued and a judgment is entered against him or her, the judgment creditor can garnish the funds in your accounts because for all they know they are also funds of the judgment debtor. Do you have that kind of money? It is kind of a blank check because there is no way to know ahead of time what financial problems your child or friend might encounter in the future. For sure don't do this if your child or friend already has judgements against him or her.
- But wait, there's more! What if your child or friend is married when you "added"* him or her to your accounts? Did you mean for his or her spouse to acquire an interest? Don't be surprised if the spouse ends up being a co-owner with you in a later divorce. Talk about awkward.
EXPOSURE TO UNINTENDED FUTURE CO-OWNERS
- And exactly how did you go about "adding"* your child or friend to your accounts? Did you add him or her as a joint tenant with right of survivorship? Or did you add him or her as a tenant in common? These things matter but a lot of people when doing DIY estate planning don't think these things through. Let's say you just added his or her name without specifying the form of ownership. In most states this creates what is presumed to be a tenancy in common. If you added, say, two names as co-owners along with you, then the law also presumes that each now owns one-third. What happens if you die? The answer is if you die in this example, your one-third interest will become part of your probate estate and will transfer either to your heirs at law or to the beneficiaries named in your will if you have one. The other two-thirds interest will continue to be owned by those two other individuals on the deed. Is that the outcome you had in mind?
- What happens in the previous example if one of them dies? Well, his or her interest will pass to HIS OR HER HEIRS at law or beneficiaries under his or her will if he or she has one? Is that what you had in mind, i.e. to become a co-owner along with your child's spouse? Or maybe the child's spouse and children?
EXPOSURE TO THEFT
- Under most state laws, when two or more people own "joint" bank accounts, each of them has the right to the entire account, no matter whose money is actually in the account. Sometimes joint owners or their agents can disagree about the use of funds in the accounts. When that happens, the party who makes it to the bank first often wins. This "disagreement" might be something as simple as the joint owner's desire to line his or her own pockets with your money.
INADVERTENTLY DISINHERITING YOUR INTENDED HEIRS
- Now let's say you added* two other individuals to your accounts along with you as joint tenants with right of survivorship. Did you intend that if you die, then one of them dies, that the last one left standing becomes the sole owner, thereby disinheriting the children of the deceased child (your grandchildren)? Just saying, that's what could happen.
- Let's say the other owners predecease you, followed in quick succession by you. As the last surviving joint tenant with right of survivorship, the property would land in your estate. But you had engaged in DIY estate planning, so you had no will, so the property passes through a probate to your heirs at law. If you were engaging in DIY estate planning, that would be a fail. And if you wanted the property to go to specific people and their heirs, and not your intestate heirs, that would be a fail too.
CREATION OF MEDICAID PENALTY PERIOD AND NO WAY TO CURE
- But wait, there's more! You had heard that the way to plan ahead to pay for nursing home expenses was to give your property away. You vaguely remember something about five years but weren't worried about it at the time. It has only been two years since you made the gift and you need to go into the nursing home now. Medicaid is going to impose a lengthy penalty period against you because of that gift, and the cost to private pay during that penalty period is more than the value of the property you gifted and, even worse, the giftee won't give it back in order to "cure" the gift, nor is he or she willing to kick in to pay for your nursing home care. Ugly, ugly situation, and it happens.
*I used the phraseology "putting" or "adding" a name "on the deed" because that is how the DIYers talk about it. It is not how attorneys talk about it. We describe what happened as the individual "retitled" the real estate or "conveyed" a joint tenancy interest" or words like that.
That's TEN reasons not to do this, and those are just the ones I could think of the day I sat down to compose this blog. I will probably think of more reasons tomorrow.
The bottom line is, you CAN have your cake and eat it too, if you do your estate planning the RIGHT way. Hire a professional. We have ways of ensuring you remain in control of your property during your lifetime, and still qualify for Medicaid, and avoid probate, and ensure that your property goes to the people you want to inherit. Talk to us! The cost of proper estate planning is, admittedly, more than DIY estate planning, but the benefits are far and away greater, and the risks are far and away fewer, too.
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