Americans love fast food. As the sign below the Golden Arches says, there have been “billions and billions served.” When you get dinner at the drive-through, you don’t have to think about ingredients, heat up the oven, or clean up the kitchen when you are finished. But if all of your meals come from fast food joints, your clothes will start feeling snug and your doctor will be concerned about your blood test results. Just because it is convenient does not mean that it’s good for you. There is something like fast food when it comes to legal estate planning for yourself and your family. There are shortcuts that are convenient but come with undesirable consequences.
The most common shortcut in estate planning involves joint ownership of property. When a parent adds a child as a co-owner of a bank account or a joint owner of real estate, the parent often believes it will lead to a seamless transition for the family when the parent is no longer able to manage his or her financial affairs. The child will be able to pay the parent’s bills out of the bank account as a co-owner. When the parent passes away, the child will become the sole owner of the real estate. With this arrangement in place, the parent may conclude that he or she does not need a will or a power of attorney.
Like the instant gratification of a Big Mac or a pizza delivered to your door, the parent is right that such joint ownership arrangements offer some immediate benefits. There are, however, potential pitfalls that far outweigh these limited benefits. Here are some of the ways this plan of joint ownership could backfire for the parent.
Changes in Family Dynamics. When a parent and child are joint owners of a financial account, each joint owner has an independent right to access the assets in the account without authorization by the other account owner. While a child and parent are getting along well, there may be no concerns about the child using the account only for the needs of the parent. If the parent-child relationship sours, there is nothing unlawful about the child using that money for his or her own desires. The child may have a new spouse with expensive tastes and ideas about how the child has earned that money. The child may deplete the funds in the financial account without the parent’s knowledge. Getting those funds returned can be difficult.
Gifting and Long-Term Care Consequences. Many older adults will require skilled nursing care in their later years. Skilled care is very expensive, but Medicaid will pay for it if the applicant has followed certain financial rules https://keystoneelderlaw.com/faq-about-medicaid-for-long-term-care/. One of the most important rules is that a Medicaid applicant cannot have given away property without receiving anything of value in return. When the Pennsylvania Department of Human Services reviews a Medicaid application, the Department will examine the applicant’s bank records and tax returns for the previous five years to see if any gifting was done. If the Department finds that money or other property was gifted, the Department will calculate a penalty period during which the applicant must pay at the expensive private-pay rate for skilled care.
The parent who adds a child’s name to a financial account or real estate deed has transferred an interest in the property to the child without receiving anything in return from the child. The Department of Human Services will consider that transfer to be a gift. Depending on the value of the real estate or the amount of money in the account, the parent who needs skilled care may be forced to pay privately for that care for a very long time.
The parent could achieve the same convenience without the costly consequences by having an estate plan prepared. The child could be authorized to pay bills with a power of attorney, which can also address a wide array of other legal and property rights of the parent. A succession plan for real estate should be part of a will or a trust, which can accomplish the distribution of property in a way that minimizes tax liability and protects assets from creditors. The McPlan of joint ownership is quick and easy, but it exposes the parent to the whims of the child, higher taxes, and lost public benefits for essential health care.
Creditors and Divorce. Even if the parent and child have an excellent relationship and the parent does not need long-term care, property owned jointly is at risk of being lost. If the child gets deep into debt with credit cards or business dealings, the creditors will seek repayment from any asset that has the child’s name on it as an owner. If the child gets sued for a car accident and insurance does not cover the whole judgment, the person who won the judgment will come looking for the jointly owned property. Given the high rate of divorce, the jointly owned property may even be the subject of a divorce proceeding when marital property interests are divided. When the parent named the child as a co-owner of property, the child’s problems became the parent’s problems. A well-drafted trust as part of estate planning can achieve the convenience sought by the parent while insulating the parent’s property from creditors.
Estate Planning. Joint ownership may also throw a monkey wrench into the parent’s plan to distribute property at the end of the parent’s life. Let’s say the parent has three children and intends to leave all of his or her property in three equal shares to the children. If the only asset that the parent owns at the time of death is a financial account with $100,000, and that account is jointly owned with one of the children, then the account will not be considered probate property and will not be subject to the terms of the parent’s Will. The child listed as joint owner will simply own that account when the parent dies. Nothing will legally transfer to the remaining two children. It is possible that the child who is listed as joint owner could distribute the funds in the financial account according to the parent’s Will. However, this child is not legally obligated to do so.
Quick and convenient may be the way to go for the occasional meal, but that is no way to make legally binding plans for everything you own. A small investment in a well drafted estate plan will achieve the result you want while avoiding disastrous pitfalls. Be sure to follow Keystone Elder Law P.C. on Facebook https://www.facebook.com/KeystoneElderLaw and YouTube https://www.youtube.com/user/KeystoneElderLaw for more information about how fast food estate planning could lead to outcomes you will want to avoid.
Patrick Cawley, Attorney