In our estate planning and probate practice, we often see situations where clients will add a loved-one on to their bank account as joint account owner or will make a “Pay-on-Death” (“POD”) designation. The reason for this is often either for convenience or to avoid probate—or both. While doing this is not always a bad idea, it must be done carefully or the owner of the account may be leaving someone out unintentionally.
Using these designations can sometimes be convenient and they typically avoid probate. However, in certain instances, they are not always ideal and sometimes they can back-fire and lead to bitter feelings among loved ones. Under Florida law, when a bank account is titled in joint names and one of the persons dies, the account becomes the property of the surviving person on the account. Similarly, when a bank account has a POD designation, the account goes to the designee upon the death of the owner.
Joint account ownership and POD designation are useful when an owner wants the account to be received all at once by a specific adult recipient. What the owner should understand is that the account will pass to whoever is named regardless of what the owner’s Will or Trust provides. In simple terms, the account is not impacted by the owner’s Will or Trust. So if the owner wishes for the account to be divided among multiple persons as designated in their Will or Trust, the joint account ownership and the POD designation could cause a contrary result.
Some clients insist that their designated joint owner or POD designee would always honor their request to share the funds from the jointly-owned account and the POD designation. This may be the case under the existing circumstances but after the owner has died, sometimes those circumstances change. The person receiving the funds may be persuaded by someone to keep the money. Our experience is that this can happen even in the nicest of families. There’s also the possibility that the recipient has been sued and the funds get attached by the creditor, or worse, by the IRS.
Another way that joint account ownership and the POD designation can be problematic is if the owner designates a person who is a minor (under age 18) or one who is financially irresponsible. Using joint ownership or the POD designation does not allow the owner to control how the money is distributed. So if the recipient is a spendthrift, he or she can go through the money and there is nothing the owner can do to control it.
We generally find that using a revocable living trust (“Trust”) is a better way to avoid probate and to avoid the problems described above. If a person sets up a Trust, he or she can either transfer the bank account into the Trust (by re-naming the account in the name of the Trust) or can name the Trust as the POD designee. Either way accomplishes the same result. This allows the funds to transfer without probate while at the same time gives the owner the ability to control distribution of the funds. This approach also assures that the funds will get distributed among all of the owner’s intended beneficiaries.
An example may help. Nancy is widowed and has three adult children. She owns a home and has checking and savings accounts at her local bank. Nancy has a Trust into which she has transferred her house. The Trust provides that her assets will be distributed equally among her three children. However, Nancy puts one of her children, Paul, on her checking account as joint owner. She does this so that Paul can help her pay bills when necessary. At the time she added Paul on the checking account, the banker asked her if she’d like to designate Paul as the POD designee on her savings account. Not understanding the implications, Nancy said “yes” and Paul was added as the POD designee. Mistakenly, Nancy thought her Trust would override the POD designation. Unfortunately for her family, she was wrong.
When Nancy dies, Paul learns that the checking account has his name on it and that he is POD designee on the savings account. Paul collects the money and refuses to share it with his siblings because Paul’s girlfriend has convinced him that he deserves the money. The rest of the family is furious because they believe that Nancy wished for the children to share equally. Under this scenario, unless the siblings can successfully challenge this outcome (which would entail filing a lawsuit against Paul), the checking and savings account moneys will go to Paul and the other children are simply out-of-luck. This was not Nancy’s intention but by using the joint account and the POD designations without getting sound advice, Nancy has left a mess that creates a family dispute. If Nancy had consulted with her estate planning lawyer about how to structure these accounts, she could have easily avoided creating this situation.