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Estate planner: Bank accounts can be a mess

April 2017

Most individuals do not think about bank accounts as potential legal issues. For many reasons, however, I always tell my clients that bank accounts can be estate planning “wild cards” both during life and at death.

In my experience, most bank account issues begin at the time the account is opened or when changes are made without proper legal advice. Most banking institutions simply require $50 and a signature to open an account and within 15 minutes the transaction is complete. There are two decisions that should be considered every time a bank account is opened or changed: listing beneficiaries at death and naming a power of attorney in the event of disability.

Beneficiary designations are one of the most efficient ways to transfer assets at death. Life insurance, IRA’s, 401(k)’s, nonretirement investment accounts and bank accounts are all types of assets that can be designated at death to named beneficiaries. However, if the bank representative doesn’t offer and the customer does not remember to name a beneficiary, then the account is opened without a beneficiary. In my experience, bank accounts are the most common financial asset that individuals fail to name a beneficiary. The result: the bank account is effectively frozen at the death of an individual owner. The bank simply informs the family of the situation and, depending on the amount of assets, requires either a personal representative letter (via probate court) or a non-probate form called a transfer by affidavit. While beneficiary designation avoids this situation, there are still hazards to avoid when naming beneficiaries. If you do not update beneficiaries, you can unintentionally disinherit heirs if one of the named beneficiaries dies before you. Additionally, if you name a beneficiary who has special needs, a substance abuse problem or financial issues, that person still receives as a beneficiary, causing even more problems.

Naming a power of attorney or an “agent” to act on your behalf to manage a bank account can be done in two ways. The first way is to draft a durable power of attorney for finances. This document appoints an agent and most likely a successor agent to act on your behalf for all your financial accounts, including bank accounts. The second way is to fill out a form at the bank to list a person to act as power of attorney over the specific account(s) held at the bank. The problem is that most of the time a bank representative adds another person as a joint owner instead of setting up a power of attorney on the account. While this might be a convenient way for the bank to allow another individual to assist you with your bank account, it can result in disastrous consequences. Most of the time it is the elderly parent who wants a child to assist them with their banking. However, the bank account is now owned by the child and subject to liabilities such as lawsuits, creditors and divorce of the child. Additionally, the child has no duty to act for the benefit of the parent and can withdraw any amount from the account. Lastly, the child immediately owns the account at the death of the parent, even if the parent wanted the account to be equally given to multiple children.

As the above illustrates, if bank accounts are not set up correctly it can lead to unintended consequences and in some cases, very expensive and complex legal issues.

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