In Part 1 of the series on joint accounts we examined tax issues that can result from joint accounts. In this article we discuss conflicts between the beneficiaries on a joint account and the estate plan under a will or trust. Although this article primarily references joint accounts, these problems apply equally to Payable on Death and Transfer on Death (TOD) designations. Conflicts between a Will and a joint account (or POD or TOD designation) create issues that are less technical than the tax issues we covered in Part I, but can actually be far more costly. In many situations, the emotions associated with an imbalanced estate result in bitter litigation that generates expensive attorney’s fees and depletes the estate.

Because joint account titles are often made without the benefit of estate planning counsel, with little analysis of the consequences, they can have profound effects on an estate. Joint account designations supersede a will or a trust. If I designate my daughter as the joint tenant of one account, but name my wife as sole beneficiary of my estate under my Will, my daughter will take the joint account. This may not make my wife very happy, particularly if the joint account represents a substantial portion of my assets. In some cases joint accounts can result in a grossly inconsistent or imbalanced estate and lawsuits.

Suppose for example, that we have a widower named “Jim.” Jim has no children and wants to leave his estate to various family and friends. Jim rents his apartment but has various financial accounts at the bank. In Jim’s Will, he divides his financial accounts as follows:

Jim names his brother executor and provides in his Will that all taxes are to be paid from the residue of his estate.

After executing his Will, Jim reads online that creating joint accounts and naming beneficiaries to his accounts are great ideas that allow him to “avoid probate.” Jim immediately goes to the bank and, without obtaining any assistance, creates joint accounts (or POD or TOD designations) on his accounts. Jim is in and out of the bank in 15 minutes and heads off to lunch, proud with the knowledge that he saved his beneficiaries from probate.

Several years later Jim dies with the joint accounts and beneficiary designations still in place. His estate now consists of the following:

• $100,000 joint account with his nephew;

• $90,000 joint account with his friend;

• $25,000 account naming his brother as beneficiary;

• $50,000 account with no beneficiary or joint title.

The $50,000 account was opened by Jim after he visited the bank to designate beneficiaries, and Jim forgot to name a beneficiary when he opened it.

Jim was working when he died. Jim’s Will has to be probated anyway to address his final paycheck, his failure to designate beneficiaries on one account, final debts and expenses, and for other issues requiring an executor. The executor later learns that Jim completely depleted an account naming Jim’s sister as beneficiary, and spent heavily from the account naming Jim’s brother as beneficiary. Jim did not do so intentionally, he was distracted by work and his final illness. He did not consider the effect his withdrawals would have on his beneficiaries.

Had Jim created no joint accounts or POD beneficiary designations, Jim’s financial accounts would have passed under his Will. Now, only one account (worth $50,000) passes under the Will. Rounding off for taxes and assuming no other expenses, the shares under the Will compared with the shares under the joint/POD accounts, are approximately:

The joint accounts and POD designations created two problems. First, they substantially altered Jim’s estate plan causing inconsistencies with his Will. The account imbalance nearly eliminated his sister’s inheritance and substantially damaged his brother’s share of the estate.

Second, the joint accounts resulted in an uneven distribution of taxes. The tax clause under the Will, which assigns the taxes to the residue of the probate estate, remains effective. Because the accounts subject to POD and joint designations do not pass under the Will, they do not contribute towards the taxes. This results in the friend and nephew receiving an inheritance that is largely tax free. The taxes on all the accounts had to be paid from the $50,000 probate account has to bear all of the estate and inheritance taxes, further reducing the share of the estate passing to Jim’s brother and sister.

In some cases, particularly larger estates, these types of imbalances lead to litigation. Both sides retain legal counsel that are all paid out of the estate, reducing the share for everyone. At a minimum, the end product is frustration with the decedent, whose final legacy are the problems he or she left behind. These types of issues should not spoil a family’s memories of the decedent. If you, or anyone you know, have questions about joint accounts or estate planning please contact experienced legal counsel.