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We are often asked whether family members should be made joint owners with right of survivorship or “Payable On Death” beneficiaries of investment accounts. Adding your spouse or child as a joint owner with right of survivorship or a Payable On Death (POD) beneficiary on your investment accounts seems to be a quick, inexpensive way to avoid the probate process. Be careful,however, as such a move may have unintended consequences. The adage, “measure twice and cut once” applies here.
1. Joint ownership with your surviving spouse or child may be good for a relatively small account to cover immediate costs after your death. Keep in mind that your POD beneficiary or surviving joint owner will own the account outright upon your death, and that asset, if large enough, will be subject to probate when that beneficiary dies. (If the balance in the solely owned account is less than $50,000.00 upon the beneficiary’s death, probate can be avoided byusing a simple “Transfer by Affidavit” document).
2. The surviving beneficiary of a POD or joint account with right of survivorship will have absolute ownership and control of the account immediately upon your death. If you add your child as a joint owner on your account as a convenience to help you efficiently manage the account, but you don’t intend that child to be the sole beneficiary of the account after your death, you may have unintentionally created a situation where your other children will be cut out. The co-owner child could “recall,” after your death, that you wanted her to have the account because she was the one who helped you the most, even though it was really your intention that all of your children share the account equally. Costly litigationcould be the result.
3. If your spouse is named as a joint owner with right of survivorship to a large investment account and s/he remarries after your death, will your children receive their intended shares when your spouse later dies? Not if s/he added his/her new spouse as a joint account owner or POD beneficiary? The only way to maintain desired control over these transfers is through a trust.
4. What if before you die your co-owner child goes through a messy divorce, is sued, or the IRS
investigates your child’s finances? The co-owned account may be in jeopardy. If convenient assistance in managing an account is what you want, consider naming your agent in a durable power of attorney document clearly specifying the extent of the financial authority you want to give to your agent. If your purpose is to avoid probate, consider using a revocable trust. The bottom line - carefully think through your purposes and then get good advice about how to accomplish your goals. “Measure twice and cut once.”
John A. Stocking
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