Q: My husband passed away a few years ago and I am worried that my kids will have trouble handling my financial affairs if something were to happen to me. Do you have any recommendations on what I can do to make sure they have access to my funds if I am incapacitated?
A: As parents age, families sometimes struggle with how to best keep their parents’ financial affairs in order. One common approach is for aging parents to put one or more of their children on their investment accounts, bank accounts and real property. As simple as this may appear, putting someone else on your account—even a trusted child—can create serious problems for you, your estate and your heirs. I am not an attorney, and this is not intended as legal advice, but there are a few things you should carefully consider before you go down that path.
When you put another person’s name on your account, you grant that person something called joint tenancy giving that person legal right to your property. For example, if I were to make my son a joint tenant on my investment account, he could withdraw all the assets from that account and dispose of them in any way he chooses without my prior knowledge or consent. Granting someone, anyone, that kind of power over your assets is a decision fraught with peril.
Making your child a joint owner of your assets also exposes those assets to claims by your child’s creditors. Consider the ramifications of this. If you make your child a joint tenant on your home and your child files for bankruptcy, you may have to buy back one-half of your own home at current fair market value to help satisfy the terms of that bankruptcy. Or suppose your child is involved in an accident. If a judgment is recorded against your child, you may have to buy back one-half of your home at its current market value to help settle those claims.
One advantage of joint tenancy is the right of survivorship. When one joint tenant dies, the property transfers to the surviving joint tenants without going through probate and without reference to any will. However, while this is simple from a probate perspective, it can really complicate relationships among heirs. Let’s suppose I name my oldest daughter as a joint tenant on my brokerage account. When I die that account will transfer directly to her as joint tenant. Even if my will says my assets are to be split evenly between all five of my children, her claim as joint tenant on the brokerage account is senior to the rest of my children. In this case, my daughter will get the assets in the brokerage account and she and her four siblings will split evenly the rest of my assets among them.
Holding property as joint tenants may also increase your heir’s tax exposure. As we stated, joint tenancy means joint ownership. When a person becomes a joint owner on an account, they receive those assets at their original cost basis. When one of the owners dies, the remaining owners get a step up in basis only on the proportion of the assets the deceased person owned at death. Let’s suppose you and your son are joint tenants on an account. When you die, he will get a step up in basis on one-half of the assets—the half that you own. His half of the assets retains its original cost basis. If that account were only in your name or in the name of your living trust, he would get a step-up in basis on the full amount upon your death.
As an alternative to joint tenancy, I recommend you consult an estate planning attorney about a living trust. A carefully structured living trust can go a long way toward helping a family provide support and oversight for an elderly parent without the legal and tax complications of joint tenancy. A trust, for example, can provide for successor trustees in the event the grantor is incapacitated or dies. In the meantime, if an aging parent needs help with paying bills, you can supplement the trust with a small joint-tenant bank account—large enough to handle day-to-day financial needs, but small enough to avoid compromising the strategic integrity of the estate plan.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.