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Thursday, September 19, 2013

Home-made estate planning: Why put a band-aid on your knee when it's your head that hurts?

It's so frustrating to see how many seniors out there are shooting themselves in the foot in terms of estate planning. Why add someone's name to your account, which gives them ownership of your money, when what you really want is an executor to handle things after you pass away? It's like putting a Band-Aid on your knee because your head hurts. People really need to find out the facts so that they will stop taking the wrong steps.

A reader wrote to me to tell me about a friend of his who is apparently freely dispensing his home-made estate planning "wisdom". I'm glad to have the opportunity to address this situation, which is alarmingly common but so dangerous for seniors. His question and my answer appear below:

"My mother has named me as power of attorney for financial and health. When she dies are her bank accounts frozen or can her money be used to pay taxes, utility bills and funeral costs? She has a will leaving everything to me. My friend said that with his father was widowed, he went to the bank and added his son’s name as joint account holder. This is so when he dies the money won’t be frozen and he would be able to pay any bills."

It's amazing to me that people will take such huge steps with their important assets with little or no facts to go on, and no legal advice. Your friend's father doesn't even know for sure that his accounts would be frozen, and yet he has now given all of his money to his son. Does he not realize that adding a joint account holder means that his son can a) legally clean out the account if he wants to or b) accidentally lose all of his father's money through a divorce, business failure or by being sued? I bet that would be a cold day around the supper table once the father found out!

That's a pretty big step for someone to take when he is only guessing that the account will be frozen, and only guessing that his son won't have access. Any  lawyer could have told him in two minutes that he is going about it all wrong.

First of all, had the father left the account in  his own name and named his son as his executor, his son could have paid all of the bills using the father's money. That's the whole point of a will. Again, a lawyer could have told him that before he gave his money away.

Now that he has created an inter-generational joint bank account, he runs the risk that when he dies (assuming the money is still there), the account WILL be frozen. This is because of case law that came into effect in 2007 that says that inter-generational accounts and property are to be held in trust for the deceased's estate. This only applies to inter-generational assets that first belonged to the older person. This rule is applied inconsistently across the country right now, but it is only a matter of time before all banks are on board and are freezing inter-generational accounts.

In other words, he did exactly the opposite of what he intended to do.

In your case, the power of attorney is not going to help you. This is because a power of attorney ceases to have legal effect as soon as the person dies. When your mother passes away, her executor, rather than her power of attorney, will have to determine her debts and liabilities and pay them from your  mother's assets. That is the primary job of the executor. Money left over will be distributed according to your mother's will.

Sometimes bank accounts are frozen so that regular incoming deposits such as pensions are discontinued, and so that ongoing bills for subscriptions, utilities etc come to an end. However, any executor can take a funeral bill to the deceased's bank and have the bill paid directly from the deceased's bank account (assuming there is enough there to cover it). That has been standard practice for years, even if the account is otherwise frozen.

Don't listen to your friend. His father has made a mistake. If your mother has appointed you as her executor in  her will, she has already set up the situation the way it will work the best.

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