When it Comes to Management of Financial Accounts, Choosing the “Convenient” Option May Lead to Inconvenient and Unintended Consequences
 
Generally speaking, there are three (3) ways that a person can hold a bank account (and other like financial accounts) with another person:
 

1. Co-Ownership (with right of survivorship);

 

1. “Payable on Death” with named beneficiaries (a.k.a. a “Totten Trust”); and

 

1. Designated authorized signatory(ies) (a.k.a. a power of attorney).

 
When setting up or reviewing one’s accounts, it is important to be sure that the account is titled properly to avoid any unforeseen consequences.
 
When people age, they inevitably start asking the question, “How will my affairs be handled if I am hospitalized or I lose the mental capacity to handle my affairs?”  One self-help solution to this conundrum that I often hear from people is, “I ‘put’ my adult child on my accounts, and he/she will take care of it…” (i.e. option 1 above). The reason that I hear most often as to why people picked that option is: “It’s convenient.”
 
But, is adding an adult child to a financial account a good idea?  The answer in most, if not all, instances is no.
 
Adding an adult child to your financial account(s) may result in the following unintended consequences:
 

1. Adding an adult child to a financial account may unintentionally change your estate plan. 

 
For example, if you have three children that you want to benefit equally in your estate under your will or trust (including receiving an equal share of your financial accounts), but you put one ofthose children on one or more of your financial accounts, that child will receive a disproportionate share of your estate because that child will receive the balance in those account(s) as a matter of law via the child being a co-owner of the account(s). In other words, the other children will not receive a share of those co-owned account(s) under your will or trust. *
 
*There may be options to rectify this situation, but it will likely require the cooperation of the unintended beneficiary (i.e. your co-owner child) and will add undue time and undue time and expense to administration of a your estate.
 

1. Adding an adult child to a financial account may subject your assets to the creditors of your child. 

 
For example, if the child on the account is sued and suffers a significant judgment, the judgment creditor may seek to satisfy the judgment out of your account, because legally, your child also now owns your account, even if this was not your intention.
 

1. Adding an adult child to a financial account may inadvertently subject you to the requirement of filing a gift tax return. 

 
Merely adding your child to the account will likely not trigger such a requirement, but if your child withdraws more than the current IRS gift tax exemption threshold (approx. $15,000.00), then you may [will most likely] need to file a gift tax return.This consideration should be discussed with your CPA and/or professional tax advisor.
 

1. Adding an adult child to certain financial accounts may unintentionally prevent your child from benefitting from certain tax advantages related to inheritance.

 
Before making the decision to add an adult child to your financial account(s), a person should seek counsel with their attorney, CPA, and other professional financial advisor(s), as it may be more advantageous to your child, from a tax standpoint, to inherit account balances rather than received them by gift during your lifetime.
 

1. Adding an adult child to a financial account may unintentionally prevent your child from qualifying from certain means-tested benefits. 

 
Because the child becomes an owner of the account, the money in the account may be a countable resource if your child is attempting to qualify for means-tested benefits such as Medicaid or financial aid for their own college-aged children.
 
The good news is that there are alternatives to adding your child to a financial account as a co-owner.  As I mentioned in option 3 above, a child can be designated a power of attorney on the account, or if it is consistent with your estate plan, a child can be added as a “payable on death” beneficiary of certain accounts.  Additionally, there are broader alternatives, such as a financial “durable power of attorney” or a revocable living trust, that may accomplish your goals if you are concerned about the management of your financial affairs in the event of your incapacity or disability.
 
In any event, you should consult with an estate planning attorney prior to making any decision with respect to your estate plan, including making changes regarding the ownership of financial accounts or changes regarding the designation of payable on death beneficiaries for those accounts.   As outlined above, adding a child to your account may seem convenient at the time, but it can cause some very inconvenient consequences both before and after your death.
 

Corb Lund Got Me to Thinking. . .
 
For those of you who do not know, a Corb Lund is not a new brand of automobile.  He is a singer/songwriter from Alberta, Canada, who, in my humble opinion, along with his band “The Hurtin’ Albertans,” makes some of the best music a person can find these days.  Lyrically, he is a talented storyteller and has a knack for making the listener think and feel.  In any event, I recommend you check him out, if you don’t already know: www.corblund.com.  Also, you can see him at the 2020 Weiser River Music Fest: www.weiserrivermusicfest.com.
 
I was listening to one particular song the other day called the “S Lazy H,” and Corb Lund got me to thinking.  The premise of the song is as follows.  A man grew up on a big cattle ranch (the S Lazy H) that had been in his family for generations.  Because the man’s dad needed help running the ranch, he did not go off to college.  Meanwhile, his sister went off to the city.  After his parents passed away, he continued running the ranch.  But, after a time, his sister returned with her new husband (who happens to be a lawyer).  His sister wants her half of the ranch (presumably spurred on by her nefarious lawyer husband) and proceeds to force the man to sell a large portion of the ranch to buy out his sister’s half.  Eventually, he is unable to make ends meet with what was left and loses the S Lazy H.  It is Corb Lund storytelling at its finest.  It is also sad, and a story that far too many people can relate.
 
The situational irony here is that the song’s villain is a lawyer, and a lawyer (in addition to a couple more team members) is just the person who could have helped avoid the sad ending in the first place.  Now, for those of you who know me, you know that self-deprecation is one of my few talents, and I certainly make no exception for my chosen profession.  That being the case, though, I am not above coming to the defense of lawyers when the situation calls for it.
 
Family farms and ranches are an icon, especially here in the American West where we have chosen to call home.  And the folks who make their living on those farms and ranches are some of our greatest land stewards.  It makes sense that those same people have a special sentimentality for the land they care for, and to some, the thought of subdivisions, development, or foreign interests looms like a dark cloud over the future of those open spaces.  In the case of the S Lazy H, its unfortunate end could have been avoided by some foresight, communication, and planning.
 
Foresight:
 
When considering a succession plan, it is important for any person to make a fair assessment of what it is that they have.  In the case of the S Lazy H, the man’s parents would have known that they had a relatively large cattle operation that relied on a significant amount of acreage in order to be viable, and they had two kids.  Based on the story in the song, they knew (or should have known) that the law would default to each of their kids getting one-half of their estate upon their death.  And they presumably knew that neither of their kids had the liquid capital to buy out the other’s half upon their parents’ death (not that their daughter and her fancy-pants lawyer husband would have wanted to ranch anyway).  Armed with this information, the parents should have asked themselves several questions:
 

• Do we want the S Lazy H to remain in the family? 
• Do we want the S Lazy H to continue operating as part of our legacy?
• Do we have a child (or children) who is/are interested in being our successor? 
• Can the S Lazy H continue to be viable if it is less than its current size? 
• Can the S Lazy H financially support more than one family? 

 
After answering these questions, it was then time for the parents to sit down and have a frank discussion with their children.
 
Communication:
 
A person’s estate plan is a personal decision, but in the case of succession planning for the family farm or ranch, communication among the family is usually advisable.  There is a lyric in the song that goes like this: “[s]ometimes right isn’t equal / [s]ometimes equal’s not fair.”  This is an apt assessment of the situation that often arises in succession planning, but if you ask me (not that you did. . . but you’re getting an answer anyway), communicating what is right, what is equal (or not), and what is fair (or not) is best put on the table on your own terms.  Planning on your terms, on the front end, rather than letting a court sort it out on the back end, will ultimately make the succession process easier and will alleviate (at least to some extent) hurt feelings.  As I alluded to above, in order to keep agriculture operations viable, the division of an estate may not always be “equal” among heirs.  This is not to say that every succession plan should have an unequal allocation of estate assets, but if there is an “on-farm/ranch” child it may make sense to leave that asset to that child.  On the other hand, if keeping the farm/ranch in the family is not a priority, it may make perfect sense to direct that the property be liquidated, and the proceeds distributed equally among the heirs. 
 
In the case of the S Lazy H, the parents would have been ahead to call a family meeting and let their children know their vision for the future of the ranch.  On the one hand, the parents could have told their son, “It’s time for you to find another job, because we are going to leave the ranch to you and your sister equally.”  Or, on the other hand, the parents could have said, “There have been six generations of our family on the S Lazy H, and we would love to see it continue; so, we are going to leave the ranch to you, son, and this is how it will work. . .”  In either circumstance, one of the kids likely would have felt put out, but at least the cards would have been on the table, so to speak.  Furthermore, it would have provided the opportunity for the children to come to terms with their parents’ decision and make their own plans accordingly.  Additionally, irrespective of their decision, the parents should have communicated with their professional team in order to effectively put their plan into action when the time came.
 
Planning:
 
Even if there is going to be an unequal allocation of the family farm or ranch, it does not necessarily mean that the estate has to be unfair.  It is important that, in addition to the family, folks communicate with professionals that can objectively advise them on their estate plan including: their attorney; their tax advisor; their financial planner(s); and their insurer(s).  Compiling a qualified team of professionals that understands your situation and goals will go a long way toward reaching peace of mind about your legacy and ensuring a seamless succession of your family farm or ranch.
 
In the case of the S Lazy H, the parents could have considered the value that their son would be getting in the inheritance of the ranch.  The parents then, in consultation with their attorney, could have made arrangements in their properly drafted will or trust to leave other assets such as cash, other (non-ranch) real property, or personal property to their daughter.  Additionally, with some foresight, they could have considered leaving investment accounts or life insurance in an “unequal” share to their daughter, by working with their financial advisor(s) and insurance agent(s).  Perhaps in the end, their estate would not have been divided 50-50, but they could have planned to make the end result more equitable to everyone involved, while at the same time preserving the legacy of the S Lazy H.

Conclusion:
 
The takeaways from the lesson of the S Lazy H are this:  1) If leaving a family farm or ranch as part of a person’s legacy is important to them, then they need to take the time to have some foresight, communication and planning; 2) Lawyers can be your friend – they’re not always the villain; and 3) Corb Lund makes some excellent music. 
 
But I suppose that if everyone heeded my advice here, then we would never have gotten “S Lazy H,” and it is one heck of a great song. So, for that I will be thankful, and let’s hope that Corb won’t have reason to pen a sequel.