Assets Passing Outside of Probate - Part Two

By Matthew D. Faulk - Decemeber 17, 2019

Last week, we discussed how certain assets can bypass the probate process. I wanted to follow up on that post because bypassing probate by adding co-owners to accounts, or “payable on death” designations, can certainly accomplish that goal. However, doing so may expose your current assets, or a beneficiary’s inheritance, to certain outside forces that could wipe out those assets. Furthermore, and depending on the nature of the asset and the timing of its transfer, one could be causing an undue headache down the road for themself, if they ever needed long-term care (think Medicaid), or unintended tax consequences for the beneficiary.

For instance, I have oftentimes visited with clients who, typically out of convenience, have added their adult child to a checking or savings account. Doing so assists the client in the management of their finances, e.g., writing checks, transferring monies, and speaking with the bank. As laudable and seemingly practical this can be, there are some undesired but all-too-real consequences. What happens if that adult child later goes through a divorce, or is sued as a result of a car-wreck? Unfortunately, were either of these events to occur, the bank account, though completely understood to be client’s sole funds, can be considered the adult child’s asset for purposes of satisfying a marital dissolution agreement, or open to liquidation in order to satisfy the judgement.

To avoid the pitfalls listed, the client would want to instead give consideration to only adding the adult child as a “signatory” on the account, execute a General and Durable Power of Attorney naming the adult child as Agent, and if possible, sign any bank-approved and bank-provided form granting the adult child a similar type of authority to manage the account(s).

What happens after the account owner passes away and they have listed on their bank or brokerage account an adult child as the “payable on death” designee? Upon the death of the account owner, that account passes by operation of law to the adult child. The outside forces mentioned above (divorce or lawsuit, as well as others) are still open to taking from the adult child what the account owner intended to pass on. To avoid this specific issue, the deceased account owner needs to think about writing their estate plan in such a way as to leave the adult child their inheritance in trust, which can act as a shield against any such claims, rather than outright. There are different ways to design this trust, but one of the primary goals is to ensure a level of asset protection for the beneficiary from the claims of their separate creditors.

So, as you can see, avoiding probate is only half the story. Consideration ought to be given as to how the beneficiary receives their inheritance. Any plan designed by an experienced attorney would be able to help navigate these issues.

In light of the holidays, we will be taking a respite until after the first of the year. The first post of 2020 will focus on how the trusts mentioned above can be established and how they operate.