Bank Accounts Help With Estate Plans
Opening a bank account can be a form of estate planning, depending on how you designate the owner of the account.
There are two basic types of account ownership that can be used effectively to transfer your money to another person upon your death: joint-tenancy accounts and “pay on death” or Totten trust accounts. Both will avoid probate.
A joint-tenancy account, a standard option at most financial institutions, allows each owner access to the money in the account and the right of survivorship upon the other’s death. In fact, the account is sometimes abbreviated as JTWROS for “joint tenants with right of survivorship.”
For two people in the same family, such as a husband and wife, joint tenancy can be a convenient way to own a savings or checking account or a certificate of deposit. Upon the death of one of the joint tenants, the savings in the account will not be subject to probate, so the surviving owner will have relatively quick and easy access to the money.
Some Risks Involved
On the other hand, using a joint-tenancy account is not a good way of setting aside a bequest for a non-family member, since the co-owner of the account will be able to withdraw funds at any time, even long before your death. That same risk applies to family members as well, of course.
The attractiveness of joint-tenancy accounts is that they pass outside of probate. But that can also be a serious danger because they are not subject to the instructions in your will. For example, if your will says that you leave all your property to Aunt Sadie, but you have a joint-tenancy account with Uncle Harry, he will receive the money in the account since it passes to him directly upon your death, no matter what your will may say about it.
Another commonly used bank account that avoids probate and allows you to name a direct beneficiary is known as a Totten trust or “pay on death” account. In some places, it is called an “informal trust” account or a “bank trust” account, according to Denis Clifford’s latest book, “Plan Your Estate.”
Ownership of the account is usually worded something like: “John Smith, trustee for the benefit of Mary Smith.” In that example, John is the depositor and Mary is the beneficiary.
In this type of account, which is not a trust in the legal sense, only John would have control of and access to the funds. The named beneficiary has the right to receive the funds in the account after John’s death, but without going through probate.
Not Tied to Will
The funds pass to the beneficiary outside of the will, and in that sense, have some of the same benefits and problems as a joint-tenancy account. You may think you have taken care of someone in your will, but not if a substantial portion of your assets are in a “pay on death” account naming a different beneficiary.
It is important to remember that while these accounts avoid the probate process, they do not affect any taxes that may be due on your estate. There is an estate tax on amounts over $600,000, including any funds you have in these types of accounts.
The following type of bank account isn’t exactly an estate-planning technique, but it can be used to give gifts to children. These accounts are listed with your name as “custodian” for the child under the Uniform Transfers to Minors Act. It is a convenient way to save money for a child’s education. The custodian has control over the funds to use them in the child’s best interest, and at age 21, the child is entitled to take charge of the gift.
In the past, some people would use these to avoid paying taxes because the interest was taxed at the child’s lower--or non-existent--tax rate. That’s no longer true for interest earned in excess of $1,000, which is now taxed at the parent’s rate.
One final caveat about all this, from personal experience: Make sure that the bank representative fully understands what type of account you are opening and that you discuss the bank’s policies and procedures about the account. Otherwise, you may find yourself listed as a trustee when you wanted to be a custodian, or vice versa.
Klein cannot answer mail personally but will respond in this column to questions of general interest about the law. Write to Jeffrey S. Klein, Legal View, The Times, Times Mirror Square, Los Angeles 90053.