1

Adding someone as a Survivor, "Payable On Death" or Co-Owner to an account means that person will own the account upon your death

Many banks or investment companies do not thoroughly explain that adding someone to an account as a survivor or co-owner will give that person all of the proceeds of that account upon your death--no matter what a will or trust says. Many people who come to my office have done this with the intention of simply having this person help them with the account or help them pay bills from the account. Others assume that the person will distribute the account pursuant to the wishes expressed in the will or trust. This is simply untrue. This is most common with bank or savings accounts where people add a family member or friend to help them pay bills. Adding that person as a survivor or co-owner of the account means that that person will be the legal owner of everything in that account upon your death.

2

Risks to adding another person as a co-owner of an account--Potential Fraud and exposure to Judgments

When you add a person to your account as a survivor or co-owner of an account, you are basically making that account an asset of that other person. This means that if that person has any judgments or lawsuits, these accounts can be subject to garnishment or levy. Most banks and investment firms, when accounts are set up in this manner, do not explain these risks to the account holders. Additionally, if your account is used for illegal transactions by the co-owner of the account, the account could be seized by law enforcement agencies. It could take years for you to recover funds. Finally, the co-owner of the account has an equal ability to withdraw funds from the bank. While most states have laws that prohibit elder abuse, it could still take years to recover any money wrongfully taken from an account.

3

Potential tax issues

Adding another person to an account can trigger tax issues. If the IRS considers the transfer as a gift and the amount is substantial (at least over the annual exclusion amount), you could technically have to file a gift tax return. If the accumulated amount of these transfers were high, it could actually result in actual gift taxes. For the large majority of the public..this would not be a huge concern. What is a more likely concern is capital gains taxes in the transfer of investment accounts. Investment accounts that are gifted result in the recipient getting the transferee's basis in the price of the investment. If the transferee gets it as an inheritance instead of as a gift, he/she would get a "step up" in basis as of the date of death. This could be significant tax wise in accounts that have gone up in value significantly. I have seen cases where these kinds of "gift" issues have cost 10's of thousands in capital gains income taxes. A CPA should be consulted on this issue.

4

Is there a better way? Of course!

There is nothing wrong with having accounts with joint owners. People should simply know the risks and deal with people they trust. They should also understand the consequences. Additionally, there are other alternative means of having people help pay bills and manage accounts. A Revocable Living Trust allows you to appoint a trustee to manage your accounts and fund during your life and upon your death and would avoid the necessity of setting up joint accounts. The trust allows you to designate where you want your assets to go. In the alternative, a simple power of attorney would allow you to set up accounts and have your attorney in fact manage the account without having that person become a joint owner of the account. Banks generally do not give legal advice and, when they do...my experience is that it is usually not very good. Talk to your attorney and get your affairs settled the right way.