“Convenience Accounts”: What Are the Risks?

Some people realize that as they get older they may need some help with their finances. Perhaps they want someone they trust to have the ability to pay their bills if something comes up like an extended hospital stay. So, they add the trusted person’s name to their bank account, creating what some people call “convenience accounts.”

But is this really a wise move? In many case, by adding a person’s name to your bank account, you are making that person a joint owner of your account. That means that the person now has all of the rights and privileges you have with that account. The person could withdraw money, and even add another name to the account.

You may think, “Well, I trust this person. She won’t try to steal from me.” But, that is not really the problem. The problem is with the creditors of your new joint-owner.

For example, let’s say your trusted person gets into a car accident. A lawsuit ensues, and your trusted person is found liable. If she does not have enough insurance or assets of her own, the plaintiff from that lawsuit now has every right to attach your bank account to satisfy the judgment.

Adding a person as a joint owner of your bank account simply opens your money up to additional risk. The same goal can be achieved with a very inexpensive document that also avoids the additional risk. That is the power of attorney.

Through a properly drafted power of attorney you appoint a trusted person to be your agent. Your agent can do everything you have the legal right to do, such as draw checks on your checking account. However, all of your assets remain yours, and do not become the joint assets of your agent. This means that your assets can not be used to satisfy the debts of your agent.

Your lawyer can help you create a power of attorney that is right for you, creating powers for your agent that are as broad or as narrow as you want. You should also consult with your bank, as many banks either have their own power of attorney form or their own rules for appointing a power of attorney. A power of attorney can be an important part of your estate planning package.

Avoiding Guardianship Proceedings

Proceedings to appoint a guardian or conservator can very difficult ones. Such proceedings can be costly. The petitioner (the person bringing the lawsuit) may be required to advance to the attorney his or her fees, and, in Virginia, may also be required to advance court costs and the fee for the Guardian ad Litem. While some of these costs may be recoverable from the estate of the ward (the person who needs the guardian) if a guardian is appointed, they remain at risk during the pendency of the proceeding. The petitioner may also need to pay the doctor a fee for preparing a report.

Guardian proceedings are intrusive. The petitioner may be required to air out in public papers and a public hearing those facts that require the appointment of a guardian. This can include evidence of behavior showing that a person has lost the ability to make decisions or engage in activities of daily life without assistance. This can be embarrassing for the family.

For these reasons, if a proceeding to appoint a guardian or conservative can be avoided it should.

Guardianship proceedings can be avoidable with a little planning. If you believe that you may need help in the future with finances and healthcare decisions, and you know somebody you can trust, you can make legal arrangements to appoint another person to make those decisions for you.

Through an advance health care directive (also known as an advance medical directive), for example, you can name a trusted person as your “health care proxy,” and give that person instructions on how you want medical decisions to be made. If you become unable to make the medical decisions for yourself, your health care proxy steps in to make the decisions, based on your guidance.

Another important tool is a power of attorney. With this document, you can appoint an agent who will have the same legal power you have to make decisions regarding your property. The power of attorney can be as broad as you like, or as narrow.

Finally, if you have a complicated financial situation, and foresee the need professional help in managing your assets, you can create a living trust. Through the trust agreement, you can appoint a person to help you manage your property, but still maintain control over that property. You can even use this legal tool as a substitute for a will to avoid probate.

These legal arrangements are far less expensive than a guardianship proceeding. They also have the advantage of keeping your personal matters private.

If you have, or a person you know has, been diagnosed with the condition such as Alzheimer's disease, dementia or certain mental illnesses, it would be beneficial for you to consult with a lawyer now to consider the options and avoid later guardianship proceedings.

The Utility of a Living Trust

If you've even only thought about planning your estate, many people assume that any plan must include a living trust. While I agree that the living trust can be a useful document, I also believe that it is not for everyone. Before you make any decision whether to create a living trust, take into account your individual situation and the advantages and disadvantages of including a living trust in your estate.

What is a living trust? A trust is merely a legal arrangement where one person, called a trustee, holds property for the benefit of someone else, called the beneficiary. A trust can be created by a person through a will, which is called a "testamentary" trust. A trust can also be created while a person is alive, which is called an "inter vivos," or living, trust.

In most instances, when a person creates a living trust, that person becomes both the trustee and the beneficiary. That way, to the outside world, how the property is held appears no different than if no trust were created. But, if a property is included as part of a living trust, the creator can establish rules about how the property is to be distributed after his or her death. That way, the property can pass to someone else without the need to go through probate. Probate is a court proceeding that can tie up an estate for several months before property can be distributed. In Virginia, when a probate estate is opened, a tax is applied based on the value of the property passing through probate.

Avoiding probate is the primary advantage of a living trust, and the reason this type of instrument was created. One thing to consider is that in Virginia, probate can be expensive.  Filings, such as inventories and accountings, can come with filing fees of hundreds of dollars.  That does not include the lawyer's and accountant's fees in drafting up the filings.  However, there are some disadvantages that need to be considered before you decide to make a living trust.

The problem is that owning property through a living trust can be inconvenient. Property needs to be titled through the trust. Checks drafted on accounts held by the trust need to be signed by noting the signatory is the trustee. Thus, the benefit of avoiding probate should be weighed against the inconveniences and costs associated with setting up a living trust.

For example, in Virginia, real estate passes to the next owner upon the filing of the will. Thus, if the bulk of a person's estate is real estate, probate in Virginia can be a simple process. Moreover, for most pieces of property, the probate tax can be less than the price of establishing a living trust.

What, then, are some of the main reasons aside from avoiding probate to have a living trust?

One is to control the distribution of an inheritance to a minor or person who has not reached an age of maturity. Parents of young children, or even young adults, can establish a trust in order to place a responsible person in charge of an inheritance until the child reaches a certain age. For a plan like this, it may even make sense to designate the trust as the beneficiary of any life insurance or other pay-on-death accounts, such as retirement benefits.

Another reason is to have a living trust is to provide for your care if you become unable to manage your affairs because of disability. By naming a person to step in as trustee if you become disabled, you can ensure that someone can have access to your finances and pay your bills. In many instances, banks and other financial institutions are more willing to work with a trustee than a power of attorney.

Finally, creating a living trust can provide assistance to people who need help managing their money. If there is no one in the family or close friends that would be appropriate trustees, by creating a living trust and naming a professional as the co-trustee, you can provide some assurance that the trust will be managed properly.

A living trust is a very flexible document, and can be a useful tool for your estate plan. Whether to create one, and how to structure it are issues you should discuss with an attorney as you consider your own estate.