“Should I add one of my children to my bank account?” It is a question I have received on a regular basis from clients for the past twenty plus years. A parent adding one (or more) child’s name to a financial account (bank account, brokerage account, etc.) is commonplace. Sometimes a client will say to me, “I put my daughter’s name as beneficiary of that account. That way, when I die, my daughter can pay my final expenses.”
My advice over the years has been consistent—Do not do these things. Let’s assume that Mrs. Smith has four children. All of her children get along as far as Mrs. Smith knows. She names her daughter Mary as the beneficiary of her life insurance policy and her IRA because she wants Mary to have easy access to money to pay her bills after Mrs. Smith dies. She trusts Mary to divide the remaining of these funds with her three siblings.
Mrs. Smith also adds Mary’s name to her accounts at the bank. She wants Mary to have access to her bank accounts in the event she needs long-term care.
By naming Mary as the beneficiary of the life insurance and IRA, Mrs. Smith is giving those assets solely to Mary after Mrs. Smith dies. Mary could use the money she receives from the life insurance policy and the IRA to pay Mrs. Smith’s bills (funeral bills, final medical expenses, etc.), but Mary has absolutely no legal obligation to pay any of Mrs. Smith’s debts with those assets.
If Mary said, “No, mom wanted me to have that money,” even if the other children all swore that mom wanted Mary to use the money to pay mom’s bills, Mary can still retain the money. By naming Mary as beneficiary, the money belongs to Mary after Mrs. Smith dies.
Now, my guess is, in most cases Mary does use the money to pay Mrs. Smith’s bills and does divide the remainder of the money with her siblings. But counting on Mary to do these things is a wish, not a plan.
When Mrs. Smith dies, her executor has an obligation to pay her debts before making any distributions to her beneficiaries, that is, her children. If Mrs. Smith has funeral expenses, medical expenses, credit card debts, etc.—all of those debts must be paid with the assets of Mrs. Smith’s estate before the beneficiaries of her estate can receive any inheritance.
Let’s assume that Mary is named in Mrs. Smith’s Will as the executor of her estate. The process of Mary submitting Mrs. Smith’s Will to probate in New Jersey is extremely simple and costs very little money, about $200. The process of submitting a Will to probate takes about thirty minutes; the surrogate—the government official who admits Wills to probate—is merely checking that Mrs. Smith’s Will is a valid Will. Most Wills, particularly those that an attorney has drafted, are valid Wills.
Mary has to wait ten days after Mrs. Smith’s death before she submits the Will to probate. I always say that an executor will have access to the decedent’s funds within three to four weeks. All of the decedent’s bills—including the funeral bill—can wait three or four weeks to be paid. It would take Mary three to four weeks to claim the life insurance proceeds or to claim the IRA, so naming Mary as sole beneficiary does not give her quicker access to the funds.
Naming Mary as co-owner of the bank accounts does give her immediate access to the bank accounts; however, it also makes Mary a co-owner of the accounts.
If Mary were to get sued (say from a car accident) or divorced or if Mary were to die, then Mrs. Smith’s assets would be tangled up in Mary’s personal problems. Her soon-to-be ex-spouse could make a claim for Mrs. Smith’s bank accounts, arguing that Mary owns the accounts. The person who Mary injured in the car accident could claim that the bank account is Mary’s and try to access the account to satisfy any judgment he obtains against Mary for causing the car accident. If Mary dies, her estate could make a claim for the bank account.
The power of attorney avoids the need to name Mary as co-owner of the account yet grants Mary access to the account in a way that solely benefits Mrs. Smith and poses no risk to Mrs. Smith’s assets. The bottom line is, have the basic estate planning documents (a Will, power of attorney, and advanced health care directive) drafted. Do not try and do work arounds to avoid these basic documents that everyone over the age of eighteen should have.