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Does Your Estate Plan Cover Your Bank Accounts?

Summary:
You just got the final draft of your estate plan. You’ve been thinking about this for a long time—how you want your estate distributed, who you want to take care of, who you want to benefit. As you scan the document, it includes your exact wishes for disposition of all the major assets; stocks and bonds, property, business ownership. But does the plan say anything about bank accounts? Since bank accounts are not always major assets, they can be overlooked and not included in an estate plan. To make sure money in those accounts is distributed according to your wishes, it’s important to know the ins and outs of bank account registration and ownership. Then verify that your accounts are titled in a way that meets your criteria.   Individual Account Individual accounts are owned by only one

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You just got the final draft of your estate plan. You’ve been thinking about this for a long time—how you want your estate distributed, who you want to take care of, who you want to benefit. As you scan the document, it includes your exact wishes for disposition of all the major assets; stocks and bonds, property, business ownership. But does the plan say anything about bank accounts?

Since bank accounts are not always major assets, they can be overlooked and not included in an estate plan. To make sure money in those accounts is distributed according to your wishes, it’s important to know the ins and outs of bank account registration and ownership. Then verify that your accounts are titled in a way that meets your criteria.

 

Individual Account

Individual accounts are owned by only one person. When you die, the money in the account is included in your estate and distributed according to the terms of your will or trust.

 

Joint Tenants with Right of Survivorship

Joint Tenants with Right of Survivorship (JTWOS) is the most common type of joint account. Two or more people own the money in the account. When one account holder dies, the account funds transfer to the surviving owner(s) and are not included in your estate.

However, if specific instructions are in place by owners of a JTWROS account specifying something other than transferring the money to the surviving account holder, then a portion of the funds will be transferred to the deceased’s estate to be distributed according to the provisions of the will or trust. In this case, the possibility of contested litigation is a possibility.

 

Joint Tenants in Common

In the case of Joint Tenants in Common, account owners decide in advance how they want to distribute the funds when one owner dies. For example, if one account tenant owns 60% of the assets and that person dies, 60% of the bank account goes into the deceased’s estate and is subject to the terms of the will or trust.

 

Tenants by the Entirety

Tenants by the Entirety is the least common type of joint account. As with JTWROS, each person listed on the account is considered a 100% owner, and when one owner dies the assets are transferred to the remaining owners and do not go into the estate of the deceased. The added benefit of Tenants by the Entirety is that the remaining account owners are generally protected from litigation over ownership of the funds. This type of account is not available in every state.

 

Pay on Death (POD) or Transfer on Death (TOD)

Naming a person as beneficiary of POD or TOD accounts means that at death the person named can receive the money in that account immediately because it does not go through probate. However, if your intent is to have the money in this account go into your estate to be distributed according to the instructions in your will or trust, POD and TOD registration may not be appropriate.

 

Ownership for Convenience

Be careful about naming a joint owner for convenience. It’s common for an aging parent to add an adult child to a bank account. The thinking is that if the parent’s health or mind declines and they can’t take care of their finances, the child, as joint owner, can step in immediately and handle the finances. Good thought, but I’ve seen it go horribly wrong. The old adage is true—money changes people. The person you named as joint owner has access to the money in your bank account while you’re alive and can clean it out.

I had a 90-year-old client with Alzheimer’s. His daughter was joint owner of his checking account. She began spending tens of thousands of dollars to remodel his house, knowing she would inherit the house at his death. When he died, the remaining money in his checking account was transferred to the daughter, who was also the executor of his estate. The Father’s estate was substantially smaller because of the home improvements and the other adult sibling was not happy.

I heard another story about a man with $300,000 in an individual bank account. His will stated that the $300,000 was to go to his two children from his first marriage. Shortly before his death, he added his second wife as joint owner for convenience. But wife number two cleaned out the account, claiming the money was 100% hers as joint owner.

If you’re thinking about adding a joint owner to your bank account for convenience only, you may want to change the language in your will or trust to state that adding them was specifically for convenience only. The additional language will make clear your intention that the account goes to your beneficiaries. Another option is stating that any amount a beneficiary is to receive will be reduced by any joint assets that person receives.

Who owns your bank accounts? Make sure they’re registered properly to keep your estate plan intact and achieve the outcome you want.

 

This article is presented as information only and should not be considered as tax or legal advice.

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