You may be a party to a joint checking or savings account – most married people are and many seniors have children or other loved ones on one or more bank accounts. In choosing the type of account to have, you may have sat down with a bank officer who might have briefly explained how the account works. Do you remember those details? Did you make the decision as a part of a comprehensive plan to deal with the control and eventual disposition of your estate, or did you, like most people, simply choose what the bank officer advised after a five-minute (or two-minute!) explanation?
Banks and other financial institutions provide a variety of account options to suit many needs. State law governs the control of the property in these accounts during your life and, equally importantly, after your death. Accordingly, these accounts function as a parallel, or a substitute to, a Will. If you are uncertain as to how these accounts function, they may run counter to your intentions. Likewise, when they are used properly, these accounts can be important estate planning tools to help put your intentions into action.
Joint Accounts
Joint accounts are the most common accounts and the ones with which you are most likely to be familiar. Both Missouri and Illinois recognize joint bank accounts. Typically you would name a spouse on the account, but you may name any other person on the account as well – it could be your child, sibling, parent or friend. In these accounts, generally speaking, any individual named on the account may access the funds at any time during your lifetime. The upside is that your joint account holder may write checks and pay bills from the account – certainly a significant convenience in managing a household or as aging takes its toll. The downside is that your joint account holder may withdraw all of the funds from the account and you will have limited rights for reimbursement.
Money placed into the account may also be subject to the creditors of all persons named on the joint account. In Missouri and Illinois, the debtor must have actually contributed to the joint account, in any amount, in order for a creditor to be able to reach the joint account’s funds through a garnishment. However, in the event of bankruptcy, the entire account constitutes a part of the bankruptcy estate.
Missouri, unlike Illinois, recognizes a type of ownership in an account called “tenancy by the entirety,” which provides some protection from creditors. In Missouri, there is a presumption that any money contributed to a bank account in the name of a husband and wife will be held in this form. Tenancy by the entirety provides some asset protection in that the amounts in the account cannot be reached by creditors of only one spouse.
If, for example, George and Gracie have placed money into an account owned as tenants by the entirety, and George incurs a significant debt, George’s creditor may not, generally speaking, reach this money. Under Illinois law, however, (and under Missouri law if a tenancy by the entirety is not applicable), creditors of one party will often be able to reach all of the funds of the account. For example, if George and his son Gus open a joint account, and Gus incurs significant debt, Gus’s creditors will likely be able to garnish the account, and George will have little protection.
Under both Missouri and Illinois law, a joint account will create a right of survivorship for the surviving joint account holders. This means that if George and Gracie are the only two named parties on the joint account, and Gracie dies, George will become the sole owner of the account. As a practical matter, this means that George will have ready access to the money in the account immediately after Gracie’s death without having to go through any probate procedures. This is often important if the survivor does not have ready access to other funds. While joint tenancy is a useful tool, it does not provide the flexibility, potential tax benefits and creditor protection that more thorough estate planning can provide. Moreover, the joint account only applies to the money in the account itself, not other assets that a person may have.
Pay-On-Death Accounts
An alternative to the traditional joint account is the Pay-On-Death or “P.O.D.” account. This type of account is available in both Missouri and Illinois and is governed by the statutes of each state. Generally speaking, this type of account functions as a typical account except that the funds will be paid to a beneficiary upon the death of the last named owner on the account. For example, Gracie can create a P.O.D. account with her daughter Gwendolyn as the P.O.D. beneficiary. On Gracie’s death, all money in the account will be paid to Gwendolyn (and become her property). Unlike in a traditional joint account, Gwendolyn (and Gwendolyn’s creditors) will have no right to access the account until Gracie dies. Gracie can also change the beneficiary on the account at any time without the consent of the beneficiary.
P.O.D. accounts can have multiple beneficiaries and multiple owners. The legal consequences of this can be fairly complicated and may not correspond to your testamentary intentions. For example, George and Gracie can open a P.O.D. account naming Gus and Gwendolyn as beneficiaries. George and Gracie will effectively be joint tenants with the right of survivorship. Upon the death of both George and Gracie, Gus and Gwendolyn, assuming both are still alive, will take the account in equal shares. However, problems may arise. Assume Gracie dies first. George may then change the P.O.D. beneficiary to his favorite nephew Gary, and there is little, if anything, Gus and Gwendolyn may do about it.
Another example of where problems arise with P.O.D. accounts is where an elderly surviving parent, their assets invested solely in Certificates of Deposit, places the name of each of their children on separate CDs, such that Parent and Child A are on the first CD, Parent and Child B are on the second CD, and so forth. The parent’s objective in such situations is generally to avoid probate and leave their children with equal amounts of their estate upon their passing.
The problem with this strategy is that the parent will likely need to surrender at least one CD for living expenses, and in so doing, one or more, but not all of the children, may end up with an unequal distribution of the parent’s estate. The problem is that much more dramatic where, to cut down on the number of CDs, the denominations are in substantially large amounts, such as $50,000.00.
Like a joint account, a P.O.D. account may provide a useful source of funds to the beneficiaries after your death. The beneficiaries may access the funds without having to go through a probate procedure (typically by only providing the bank with the necessary death certificates). Because the beneficiaries have no access to the money prior to the death of the owners, a P.O.D. account functions more like traditional testamentary dispositions and is sometimes called a “poor man’s Will.” Nonetheless, a P.O.D. account does not provide the flexibility and ensure your intentions are realized in the same way as traditional estate planning instruments.
Safe Deposit Boxes
Both Missouri and Illinois permit joint ownership of a safe deposit box. Unlike joint and P.O.D. bank accounts, the ownership of the safe deposit box creates no presumption of the ownership of the contents of that box; it only presumes (unless otherwise specified) that all parties have access to that box. If George places a rare baseball card that he owns in the box, the card remains legally his and therefore, part of his probate estate after his death. However, Gracie will have access to the box (and therefore the card) at any time, during the life or after the death of George. In practice, this access can complicate the legal issues of ownership and can place the contents of the box at risk. Accordingly, joint ownership of the safe deposit box (and choice of which items should be placed in the box) should be done with care and planning.
Conclusion
Joint accounts and P.O.D. accounts are quite useful and, in some situations, with only a simple Last Will and Testament, sufficient to address a person’s needs in their twilight years and their intentions after their passing. However, as discussed above, there are limitations to these tools’ effectiveness.