My Beneficiary/Joint Owner Will Handle Things. Not!

“I’ll just name my sister or brother as beneficiary of all my accounts; they will know what to do to take care of my minor children when I am gone.” Or “I will name just one of the kids as joint owner of everything; they will pay my bills if I can’t and will divide it up and distribute it to their siblings after I’m gone.” Many people, including numerous married couples, use joint ownership and beneficiary designations as their own do-it-yourself probate avoidance mini estate plan.

If all the stars line up just right, you might be lucky enough to have joint ownership and beneficiary designations work as intended to provide for you during your lifetime and transfer the account upon your death to your loved ones. Or you may be one of the many unlucky ones for whom joint ownership and beneficiary designations backfire and do not work as intended; one of your joint owners or beneficiaries gets sued, gets sick, gets mad, gets greedy, gets married, gets divorced, is a minor or dies in the wrong order. Today we will discuss how easy it is to have one or more of these unintended consequences.

What if my joint owner or beneficiary gets sued?

Most of your joint accounts with banks and other financial institutions allow any joint owner full access to the entire balance in the account. Because of this, your joint owners’ creditors also have full access to the entire balance in the account . If one of your joint owners gets sued, his or her judgment creditor may garnish your account, since it is also their account. I saw one situation in which a woman lost her entire life savings held in joint bank accounts with her son because her son got sued, didn’t pay the judgment and was garnished.

Similarly after death with both joint owners and beneficiaries. If they are sued, they could lose everything and nothing would be left for your loved ones. I saw one case in which a creditor garnished over $100,000 from a distribution to a beneficiary son after his father’s death

What if my joint owner or beneficiary dies in the wrong order?

If your joint owner dies before you do, you become the sole owner of the account and after your death, that account will go through probate. If you have a will, it will be distributed through the probate court process according to your will. But if you do not have a will, it will go through the probate court process to your heirs in accordance with the statute your Michigan legislators provided for such instance.

If your beneficiary dies before you do, it depends on what the beneficiary form and/or account agreement provides. In such cases, the distribution could go to the beneficiary’s children and other descendants. Or it may go the beneficiary’s heirs, which includes the beneficiary’s spouse, as well as the children. The paperwork could provide that the distribution will end up in the probate estate of the beneficiary, or even your probate estate.

If your joint owner or beneficiary dies after you do, your accounts would have been owned solely by them at  the time of their death. Consequently, your accounts would go through the probate court process in accordance with their will if they had one, or to their heirs if they did not have a will.

What if my joint owner or beneficiary gets mad or greedy?

The way most joint account agreements are written at banks and other financial institutions, any joint owner has the right to withdraw any amount from that account without the permission and/or consent of the other joint owners. However, your joint owner may be a child who is having financial difficulty. He or she may decide to “borrow” some of your money to help him or her out of the financial difficulty with every intent of paying it back, but typically can’t because of that financial difficulty.

Or you may have a child that is just greedy. It is awfully tempting for some children to see your pile of money that they can access, just sitting there doing nothing except earning income. A child may decide to make withdrawals from your accounts to get an early inheritance. Besides, you weren’t using it anyway.

Or after your death, the joint owner or beneficiary, or maybe their spouse, could decide that the beneficiary should keep the entire amount. Legally it is their money. They do not have to share it with anyone else.

What if my joint owner or beneficiary gets married or divorced?

If your joint owner is married, your joint accounts could be considered part of their marital estate in the event of a divorce property settlement, even during your lifetime. This could also happen with a married beneficiary after your death because the entire amount in your accounts would be considered their property.

What if my joint owner or beneficiary gets sick and becomes mentally incapacitated?

If your joint owner or beneficiary becomes mentally incapacitated and has not done proper planning, a conservator may have to be appointed by the probate court to handle the beneficiary’s property and finances. The joint or beneficiaried funds are considered the joint owner’s or the beneficiary’s and may need to be used solely for their benefit.

What if my joint owner or beneficiary is a minor?

After your death, if your joint owner or beneficiary is a minor, they cannot legally hold those accounts in their sole name. A conservator would have to be appointed by the probate court for them. The conservator would hold the inheritance for the minor’s sole benefit until age 18, when they miraculously gain all the wisdom and insight of adulthood and are able to manage large sums of money. At age 18, your joint owner or beneficiary is entitled to the release of the entire inheritance held in the conservatorship. Oftentimes, the inheritance is used for college, the University of Corvette.

Joint ownership and beneficiary designations are not a substitute for a properly drafted estate plan which, at a minimum, includes financial and health care powers of attorney and a will, and often includes a revocable living trust. You can avoid these problems of joint ownership and beneficiary designations by having a properly drafted estate plan, and coordinating ownership and beneficiary designations with that plan.

Without this additional planning, there is no assurance that joint ownership or beneficiary designations will avoid the intrusion of the probate court. With proper planning, you increase the likelihood that you stay in control of your assets while you’re alive and well, provide for you and your loved ones in the event of your mental disability, and when you’re gone, give what you have to whom you want when you want the way you want, all at the lowest overall cost to you and your loved ones.

By Matthew M. Wallace, CPA, JD

Published edited December 17, 2017 in The Times Herald newspaper Port Huron, Michigan as: Don’t leave your plans to random luck

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