If you’re like most people, adding your child to your bank account seems like the easiest thing to do, rather than relying on legal documents like a power of attorney. There are at least three reasons why this estate planning “shortcut” is a bad idea.
Your child may have to pay gift taxes if they do the “right thing” for their siblings
When you add your child to a bank account, they become a co-owner of the account, which means they become the sole owner of the account at your death. Any money they give to their siblings or anyone else will be considered a gift, and will fall under gift tax rules, not under any inheritance rules. Currently, the gift tax exclusion amount is $14,000.
You disinherit your other children
As one person found out when her sister decided to keep her father’s $100,000 bank account, there was nothing she could do. Plus, the estate expenses were paid from other assets of the estate, and nothing from the bank account – that money now belongs to her sister.
You expose yourself to your child’s financial woes
The worst thing that could potentially happen to your bank account is to have your child’s own financial woes spill over and effect your account. Because your child’s name is on the account, collectors, creditors, and litigants are all going to be looking at your bank account. As a co-owner, your child can take money out for any reason, and you won’t have any recourse against them. If your grandchildren are applying for college loans, your account could get in the way.
Adding a child to your bank account is one of many choices people make that have unexpected outcomes. Consulting with a financial planner and an estate planning attorney can help you avoid these pitfalls.
My dad always said that wisdom is learning from other people’s mistakes – it’s cheaper than learning from your own mistakes. Here is a classic example to learn from: the estate of Estelle Elsa Manwell, from El Dorado County. Ms. Manwell was well to do – according to court documents she owned real estate in Contra Costa and El Dorado County worth $1,238,848. Ms. Manwell must have known that she did not have much time to live because she signed a handwritten will just days before she passed away. This handwritten, or “holographic” will left her estate to her 5 living children, but stated, “I do not want any of my property sold outside of my family for a minimum of 20 years.” The will also neglected to nominate an executor or mention whether the executor would be required to carry a bond. Ms. Manwell’s will left a few problems for her children.
Because by statute the executor is paid the same as the attorney (though some may choose to waive this fee) the position can have an enviable financial bonus for an heir. For an estate of $1 million, the executor can collect $23,000. The court records indicate that the children of Ms. Manwell fought over who would be executor. This fight could have been avoided by simply naming the executor in the will. Now the family relationships will have to recover from what was said and done in a public (and expensive) forum.
The attorney’s fees and executor fees could have all been avoided by creating a trust, allowing the assets to pass to the heirs without going through probate. That amounts to nearly $50,000 in expenses, not to mention the months, and potentially years it will take for the court to process this hand-crafted document.
Tying beneficiaries hands
Sometimes restraining the beneficiaries is for their own good, and serves as a way of protecting them from creditors or their own foolish choices. But in this case, the children (likely all in their 40’s or older) will be forced to stay on title together on assets with which they can do nothing until 20 years later, minimum. These five children, who have just finished fighting over who will be the executor, will have to manage multiple properties in several counties – together. I have a feeling only the lawyers will appreciate this arrangement. Managing real estate can be time-consuming and costly. Managing with multiple owners with their own unique perspective, and potentially antagonistic attitudes towards each other is a recipe for waste. Sometimes a client has a sentimental attachment towards particular items, like a home wrapped with memories of family events, holidays, and birthdays. I try to remind clients that their children have their own fond memories, but also have their own lives to lead. Tying their hands and preventing them from making necessary decisions could ultimately hurt their children in the long run. Better to create a structure that will make it easy for the children to carry out your wishes, but gives them necessary options.
Haste makes waste
In summary, by leaving these planning decisions to the very last minute, Ms. Manwell left behind a situation that will cost her children financially and emotionally over a long period of time. All of these things could have been avoided by careful advanced planning.
Missing files. Unprocessed checks totaling several hundred thousand dollars in filing fees. A procedural and paperwork mess that saw pleadings as far back as 2015 not docketed or scanned. The legal system is complicated enough, but when clerks behind the counter can’t handle the paperwork, the system doesn’t function. And unfortunately, that is exactly what happened in the Suffolk County Probate & Family Court in Massachusetts.
It was apparently an office already in trouble, the prior Register in charge of the office lost her seat after allegedly assaulting an employee after a holiday party. In 2014, with a new Register, the situation didn’t improve. The court brought in a temporary manager in October 2016 who found fifty bins of files scattered throughout the office. They estimated that an average of 20-30 cases went missing on any given day.
In California, the court system went through a rough patch when the statewide budget cuts hit. Things have improved, and overall thankfully, our local Sacramento office runs well.
Usually, when I discuss the probate process, and the reasons why you should avoid it, I assume a functional court. Unfortunately, this story illustrates that isn’t always a safe assumption.
Planning for worst case scenarios is the reason why we get life insurance in the first place. But could some simple wording changes on your life insurance beneficiary form make a big difference? It could make the difference between the court sitting on the money until the child turns 18 instead of the person you trust being able to immediately use those funds for your child’s benefit.
When discussing options for life insurance policies, retirement accounts (IRA’s, 401k’s, etc.), and in naming beneficiaries in a will or trust, there are three options, which I’ll take in order of simplicity.
Option 1: Naming The Child Directly, After The Spouse
You can name your children specifically or as a class, for example, “all my children.” This effectively puts the court in charge of the funds until the child reaches adulthood at age 18. You’ll have to go to court, and request that they appoint a guardian who will manage the funds under the court’s supervision. The formal procedures that the guardian will have to comply with in order to utilize the funds, however, make it difficult for the guardian to use the money effectively except for the most obvious needs. After the child reaches the legal age of adulthood, 18, the court then turns the entire account over to them. Needless to say, this isn’t an ideal option.
Option 2: Use an UTMA Designation
With some simple additional language, the beneficiary designation can specify a custodian to manage the money under the California Uniform Transfer to Minor’s Act. The custodian is free to proceed without the court’s supervision, which can be a good or bad thing, depending on the skills and faithfulness of the custodian. However, aside from relieving some of the burden of the formal procedures a guardian faces from court supervision, the same problem of the custodian’s control terminating upon the child’s 18th birthday applies to UTMA accounts, unless you specifically authorize the custodian to act until age 25.
Using an UTMA account has the benefit of being cheap (you don’t need an attorney to set one up) but it does have some limitations. You’ll need one account per child, meaning you can’t have a “family” account until the children reach a certain age. And you can’t give any directions or limitations on the custodian’s use of the funds.
Option 3: Use a Trust
A trust is more complex, but also the most flexible of the three options. The trustee won’t have the formal reporting procedures to the court that restrict a guardian. And in setting up the trust, we can give the trustee specific instructions. And most importantly, we don’t have to terminate the trust when the child reaches adulthood, but can choose from a number of options in paying out the funds for our children’s benefit. For my wife and I, choosing a trust makes the most sense. Using a number of financial tools, we hope our two boys will be well prepared for college and beyond.
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I remember that awkward moment as a kid when my parents decided I was old enough to have “that” talk. Now, as an adult, there’s the “other” conversation that looms – all the decisions around end-of-life care.
Debbie Reslock recalls when the doctors asked her if her mom would prefer to be in the hospital or at home for the end, “I remember how angry I was, unprepared to make this decision and wanting to scream, ‘Why are you asking me?’ But of course, when I got older, I realized the real question was why hadn’t any of us asked her?” Read the rest of her story here.
Many of us are careful planners; plotting our vacation in detail, home improvement projects, budgets – but when it comes to our own care, filling out an Advance Health Care Directive can be intimidating. Statistics show if you’ve been putting off the end of life care conversation, you’re not alone:
- 90% of people say that talking with their loved ones about end-of-life care is important.
- 27% have actually done so. Source: The Conversation Project National Survey (2013)
- 60% of people say that making sure their family is not burdened by tough decisions is extremely important.
- 56% have not communicated their end-of-life wishes. Source: Survey of Californians by the California HealthCare Foundation (2012)
- 80% of people say that if seriously ill, they would want to talk to their doctor about wishes for medical treatment toward the end of their life.
- 7% report having had this conversation with their doctor. Source: Survey of Californians by the California HealthCare Foundation (2012)
- 82% of people say it’s important to put their wishes in writing.
- 23% have actually done it. Source: Survey of Californians by the California HealthCare Foundation (2012)
Why Have “The Talk”
It’s a myth that kids mostly fight about money. What motivates the toughest battles is kids who have different opinions about what mom or dad would have wanted. When you take the time to communicate with your children about your wishes, you remove that potential future source of conflict.
The god-like decision of life or death is a heavy thing. You can send your child on a life-long guilt trip about whether they made the right decision if they aren’t sure what you would have wanted.
Visit www.theconversationproject.org for resource materials to organize your thoughts for the conversation. They also have a fascinating section of stories from families sharing their experiences around having end-of-life conversations.