Trouble, rather than convenience, may result when Mom adds son Jimmy to a bank account or other asset -- the so-called jointly held account. A better plan for enabling Jimmy to write checks and to take other actions on behalf of an aging or disabled Mom is for Mom to create a durable power of attorney document.
Banks sometimes encourage jointly held accounts even if the customer already has a power of attorney document. Insist that the bank honor the power of attorney document, which is provided for under Minnesota law. This is important because a jointly held account may place Mom’s carefully crafted estate plan in jeopardy.
Moreover, a jointly held account may do more than upset Mom’s estate plan if Jimmy owes creditors money, gets divorced, or if Jimmy is applying for financial aid to send his children to college. That’s because “Mom’s account” is now also Jimmy’s account. Jimmy’s creditors, divorcing spouse and college financial aid offices have an additional pool of money to pursue as soon as Jimmy’s name is added to Mom’s account.
Mom may have wanted son Jimmy and daughter Suzie to inherit equally. Mom’s will may even declare that Jimmy and Suzie are to inherit all of her assets equally. But jointly held assets held in a financial institution are not impacted by Minnesota wills unless Mom precisely referred to that specific account in her will and declared that Jimmy and Suzie are to inherit that specific account equally. Without such a specific declaration, Jimmy becomes the sole owner of the jointly held bank account when Mom dies. As a result, Suzie is cut out of her opportunity to inherit half of the bank account, which may cause hurt feelings and a family feud.
Real estate that is jointly held can also cut intended beneficiaries out. In addition, there’s a potential capital gains issue involved. Capital gains tax is paid on any increase that the sales price has over the purchase price. When real estate is inherited, it is inherited at the value of the property at the time of the owner’s death rather than at the owner’s purchase price. This so-called “step-up in basis” can save significant capital gains tax dollars if the asset has appreciated significantly. For example, if Mom’s home is worth $250,000 when she dies, the fact that she paid only $100,000 for it some years earlier is ignored. When her beneficiaries later sell the property for $275,000, capital gains tax is based on a $25,000 gain rather than a $175,000 gain. If Jimmy and Suzie inherit the property from Mom, they’ll get the step-up in basis. If the property is instead held jointly by Jimmy and Mom at the time of Mom’s death, Suzie will lose the most because she won’t inherit any part of the property. Jimmy will now own the entire property, although Jimmy’s step-up in basis will apply only to the half attributed to Mom’s ownership.
If Mom created a power of attorney document naming Jimmy as “attorney-in-fact” – i.e. her agent, several potential problems are avoided. When written as a so-called “durable power of attorney”, the power of attorney document remains in effect when Mom becomes unable to make decisions for herself. The power of attorney ceases when Mom dies. Armed with a power of attorney document, Jimmy can tend to Mom’s needs while Mom is alive, and Mom is able to let her two children inherit equally.
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