As people age, they often open joint bank accounts in their name as well as that of a close friend or family member. This allows the friend/family member to have access to the account to write checks and use funds to pay bills or other expenses of the older person. The person setting up this account often does this because he/she thinks it is a cheaper alternative to a power of attorney. However, establishing such a bank account can have unintended consequences.
New York Banking Law establishes a presumption that the joint account holder is entitled to inherit all of the proceeds which remain in the account after the older account holder dies. That means regardless of what is in the older person’s will, the friend/family member who was helping pay bills would get everything left in the bank account. This is often not consistent with the intentions of the decedent. It can also wreak havoc on an estate plan intended to divide assets equally among members of a group (for example—the decedent’s children).
If a joint account is set up with the intention that it is a “convenience account,” but the joint account holder attempts to claim sole right to the proceeds, the intended beneficiaries may need to resort to litigation to prove the true nature of the account. This can be expensive, and can ultimately deplete the value of the estate. It can also be difficult to establish the true intent of the decedent who established the account.
To avoid this problem, there are several options:
- Address convenience accounts in the will. The language in the will should make clear that the joint account was not established as a testamentary substitute – that is, the decedent was not intending to leave the account to the other account holder. It was instead created to allow someone to have access to funds for convenience during the decedent’s lifetime.
While this may not eliminate litigation entirely, it should at least make it more likely that the ultimate result is achieved and the account goes to the other beneficiaries.
- Use a power of attorney. A power of attorney has many benefits over joint bank accounts. Unlike with a joint account, a power of attorney makes it clear that the power holder only has access to funds to act on the Grantor’s behalf and they cannot be used for the benefit of the power holder. This offers more legal protection to the Grantor. During the Grantor’s life, the power holder has a legal duty to act as a fiduciary in the best interests of the Grantor and must account for his/her actions. After the Grantor’s death, there is no presumption that the power holder can inherit the money or has any beneficial interest in the funds.
In addition, a power of attorney can be easily drafted to restrict the powers given the power holder during the Grantor’s lifetime. The standard power of attorney form can be customized to set forth what types of actions the power holder can take and not take (paying bills, signing contracts, selling property, etc.). This also provides extra protection to the Grantor against misuse of their funds by the power holder.
No one wants to think that a person they selected to help them handle their money could take their funds during their lifetime or after their death. However, bad situations happen. The alternatives to a convenience account provide a simple solution when you need help managing your money, while also offering much better protection to you and your heirs.
Read more about our estate planning practice here.
This post does not constitute legal advice or establish an attorney-client relationship.