Protecting Your Assets: Joint Accounts and Beneficiary Designations

By Patrick Simasko and Luke Stempien

Thanks for coming back for part two of our elder law series titled “Protecting your Assets.” This article focuses on beneficiary and joint designations and the pros and cons surrounding them. If you read our last article, you will know that we consider an estate plan to be a toolbox. Every good toolbox needs the right tools for the right job. You can’t screw a screw with a hammer. We need to make sure your legal toolbox has the right tools for the job and that you understand how each of them work, just like an owner’s manual.

So, most of our readers think that a will is the most important tool in the toolbox. While a very important document, in most situations it’s the least used. Why? Well, first, a will still goes through probate. Second, wills only control those things that are in your name alone. Finally, if you don’t have a will, your state government gives you one under its laws of Intestate Succession. So instead of this, many people start naming their children as beneficiary of their assets.

Let’s look at the typical family. A husband and wife have three children. They own a house, a bank account, an IRA, and life insurance. They each have a last will and testament that says everything goes to each other, then equally to their children upon both of their deaths. If a child predeceases them, they want that share to go to the child’s children (their grandchildren), which is called “per stirpes,” meaning it goes down to the next generation in line. The husband and wife also list each other as joint owners and beneficiaries and then their children as contingent beneficiaries on all of their financial accounts.

Now, the husband dies. Does his will come into play? Nope. Why? Because his wife was listed on everything as joint owner and beneficiary. Then the wife dies. Does her will come into play? Nope. Why? Because her living children were named as beneficiaries of the bank accounts, IRA, and life insurance. And, if the wife signed a quit claim deed putting the kids on the house before she died, then the will and probate will be bypassed altogether.

Why does this happen? Beneficiary and joint owner designations are will substitutes. Remember that a will goes through probate, so a husband and wife typically try to avoid it by using joint ownership or beneficiary designations. However, they’re often mistaken by believing the will still controls their estate. It doesn’t. Rule number one, joint ownership and beneficiary designations supersede a will. It sounds awesome, but let’s see how awesome it really is.

Let’s say you put your daughter on your bank account and she gets sued, files bankruptcy, or gets divorced. Well, her problems just became your problems. The opposing counsel or bankruptcy court will grab at your account so fast your head will pop off. Not so awesome.

Say you state in your will that you want everything to go to your three children equally when you pass away, but you also only put your one son as a beneficiary of your accounts. You pass away, who gets the money in your accounts? Technically, your son and only your son. Why? Because your will doesn’t control here. It is up to your son to divide the accounts, but only if he wants to. It is shocking how many times I have to explain this concept to clients. Many times, they trust that one beneficiary, but it doesn’t always work out.

Don’t get us wrong, in many cases, beneficiary and joint designations work perfectly, but you have to understand the rules. Now let’s throw in some real curve balls to show you why we are cautious.

Let’s say a wife passes away and her husband remarries. The husband wants to leave everything to his new wife, and when she dies, he wants his assets to go to his children. That’s what his will says and his financial advisor designated all of his accounts to say the same.

Now, the husband dies and his second wife gets all of the accounts, as planned. However, she immediately changes all the beneficiaries of the accounts to her own children. Then, the second wife passes away and the husband’s children get nothing. Why? Because he used the wrong tool for the job. He assumed the will would control the estate, but in reality, it has nothing to do with it.

When the husband named his second wife as a beneficiary, she became the owner of the accounts upon his death. She had every legal right to name whomever she wanted as a beneficiary of the accounts that she now owned. This happens often. A second spouse may cut out children that aren’t theirs. In this example, the husband’s estate avoided probate, but it did not accomplish his ultimate wish, which was to protect the second wife while she was alive and then his children once she passed away.

Here’s another example. A mother has a will that distributes everything to her three children, however if one dies, their share goes down to their children per stirpes. The mother lists her three children on her house and all financial accounts as beneficiaries. Three years later, one of the children pass away of cancer and is survived by her four children. Two years after that, the mother passes away. So, who gets the mother’s assets? Her will says its split three ways between her children, but all accounts and the house name the surviving children as beneficiaries. So, everything is divided between only the two surviving children. The four grandchildren of the deceased child get nothing, unless the surviving children share the estate with them. Again, joint ownership and beneficiary designations control. The mother’s estate avoided probate, but her wishes may have not been fulfilled.

I am sure that you trust your spouse and children to do exactly what you want them to do upon your death. Many people don’t think any of the above situations would ever happen to them, however, it does, and often. It’s cheap and easy to set up your accounts so they avoid probate by using joint ownership and beneficiary designations. But be careful. You, as well as your bankers and financial advisors have to understand the rules to ensure the right people inherit your estate.

So, beneficiary and joint designations are great at avoiding probate, but is avoidance the most important thing? No. In upcoming articles, we will explore some other tools, like a revocable trust, which is used to protect your loved ones from probate, but still ensures your estate goes to the right people when you pass away.

About the Authors: Patrick Simasko and Luke Stempien

For more than 20 years, Patrick Simasko has dedicated his legal career to the practice of elder law. As a partner with Simasko Law in Mt. Clemens, MI, he helps families plan for their future, protect their assets and receive the financial and medical benefits available to them. Patrick also conducts seminars and workshops across the country to educate communities about elder law, financial planning and Medicaid, as well as VA Benefit Aid and Attendance.

Luke Stempien is a current law student at WMU-Cooley Law School. He currently works at Simasko Law Office in Mt. Clemens, MI, where he hones his estate planning skills and has developed a great understanding of all probate matters. He hopes to continue his career in this field of elder law to better serve those he feels could use his help the most.