Lynn Brenner's Family Finance

The Pros and Cons of a Joint Account With Your Child

Q: I’m considering adding my oldest daughter’s name to my checking account. With a joint account, she could pay my bills if necessary. Are there any other advantages of doing this? Are there any drawbacks? ER via email

 

A: There are both advantages and drawbacks to adding an adult child to your bank account.

On the plus side, a joint account can serve as both a current convenience and a long-range estate plan. Your child can do your financial paperwork while you're alive. And as the surviving joint owner she'll inherit the account without going through probate -- the legal process in which a court validates your will. (It's important to add, however, that whether or not avoiding probate is important depends on where you live. In some states, probate is time-consuming or expensive. In others, it's fast and cheap.)

The downside is that joint accounts have hidden pitfalls. When they don't work as you planned, the result can be disastrous for you and for your survivors.

Let's take it for granted that your child is totally trustworthy and will never use the account except for your benefit.  The main potential problem during your lifetime is that joint accounts are subject to partition. This is a fancy legal way of saying that once your daughter’s name is on the account, her creditors can claim half of it. As a result, if she gets divorced, or becomes the defendant in a lawsuit, your money could be at risk.

The potential problem for your survivors is that a joint account could inadvertently disinherit some of them.  A hypothetical example:

If you put your daughter Emma's name on your account, she'll automatically inherit 100% of the account when you die. This is true even if your will says the account is to be equally divided between Emma and her brothers, Gregory and Pete. Your will has no legal control over jointly-owned assets. They pass automatically to the surviving joint owner.

In addition to unintentionally disinheriting two of your children, this may precipitate a permanent rift in the family. (If your kids don't get along, one can imagine a very nasty scene in which Gregory and Pete accuse Emma of grabbing their inheritance, and she replies that they're more interested in your money than they were in helping take care of you while you were alive. Not the way you want to be remembered!)

Here are two alternative ways of accomplishing your goal:

Find out if your state has a law permitting "convenience-only" joint bank accounts. With this type of account, your daughter can use your money only for your convenience. She won’t have any ownership rights in the account during your lifetime or after your death.

(A big caveat: Even if these accounts exist in your state, you may have trouble finding one. In New York State, for example, convenience-only accounts have been a legal reality since 1991; but they've never been well-publicized and few banks offer or have even heard of them. Make certain that you're getting a true convenience-only account. I'd ask the bank for a written statement that the other person named on the account won't have any ownership rights in it.)

The second alternative is to keep your accounts in your sole name and give your daughter a financial power-of-attorney. That power lets her manage the accounts for you, but it confers no ownership rights, and it ends at your death.

If avoiding probate is important to you, you can make the accounts ‘in-trust-for’ or ‘pay on death’ accounts, which automatically go to the named beneficiaries. 

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

My Late Husband's Name Comes First on Our Mortgage

Q: In 1982, my late husband and I bought my co-op apartment. His name comes first on the mortgage. He died in 1987. Now Chase Bank, which holds the mortgage on the co-op, has sent me a verification notice about my husband's Social Security number.

How important is it for me to get the mortgage into my name? I have just 18 months to go to pay it off, and I don't want to spend the money to hire a lawyer. (When last I checked in 1997, I found out it would cost me $500.) --BS, via email

A:   It doesn't sound as if you need a lawyer. You should be able to resolve this simply by calling the bank.

Of course, in real life tackling a bank's bureaucracy can prove very time-consuming. You may find it takes several phone calls, and perhaps a couple of follow-up letters.

Here's a likely explanation for what has happened:

Every year, the bank files tax Form 1098 with the Internal Revenue Service, reporting the interest payment it received on your mortgage. On this form, when property is in joint names it's standard procedure to use only the Social Security number of the first listed owner.

In this form, the bank is telling the IRS that your late husband paid X dollars of interest on this loan.

In reality, of course, you are now making the interest payments. And every year, on your tax return -- which carries your Social Security number --  you're claiming a tax deduction for it.   

It sounds as if the IRS has noticed this discrepancy and is trying to resolve it by asking the bank to verify that your husband's Social Security number on the loan is correct. And the bank, in turn, has asked you the same question.

Assuming that is what has happened, if you respond to the bank by verifying your late husband's Social Security number, eventually you'll get a letter from the IRS saying you're not entitled to the deduction.

(If that happens, don't be alarmed! You have nothing to worry about no matter how long it takes to straighten this out. You are entitled to this deduction. This is just a question of updating the information on a tax form.)

My advice is to tell the bank that your husband is dead and that from now on, the Form 1098 they file with the IRS must carry your name and Social Security number. That change should present no problem to the bank because based on what you say, your name and Social Security number are both already on the mortgage. 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

Does a Will Ever Trump a Beneficiary Designation?

Q: You've written that in New York, a will can override the beneficiary designation on an 'in trust for' bank account, sometimes called a Totten trust. Every bank has told me that this is not true. They say that the `in trust for' arrangement overrides the will. Please clear that up for me. -- TR via email

 

A: For legal advice, consult a lawyer, not a bank!

The banks are right that in general, a beneficiary designation overrides a will. Most accounts with a named beneficiary, such as retirement accounts and insurance policies, go to that beneficiary no matter what your will says. 

But in Totten trusts, commonly known as bank `in trust for' accounts, are an exception to that rule, says Eric Kramer, an estate lawyer in Uniondale, N.Y.

New York's Estate Powers and Trust Law, Section 7-5.2, states that a Totten trust "can be revoked, terminated, or modified by the depositor's will, only by means of, and to the extent of, express direction concerning such trust account, which must be described in the will as being in trust for a named beneficiary in a named financial institution."

In other words, your will can override the 'in trust for' designation on your bank account -- but only if you're very specific. Your will would have to say something like: I hereby revoke my Totten trust at the Reliable Bank (account #123456) naming my daughter Mary Jones as beneficiary, and instead I leave account #123456 to my nephew Frank Smith.

Of course, it's sensible to make sure that there's no conflict between your beneficiary designations and your will.

And if you change your mind about the named beneficiary on a bank account, the solution is to go down to the bank and change the beneficiary designation. That's easier and simpler than changing your will -- not to mention less expensive!

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

At What Age Can I Move My IRA Penalty-Free From One Bank to Another?

Q: I have traditional and Roth IRAs of my own, and I have also inherited some traditional IRAs. I am currently taking annual distributions from the inherited IRAs based upon my own life expectancy. Here are my questions: 

When I reach age 59 1/2, I understand that I can "move around" all IRAs (traditional, Roth, and Inherited) without any penalty. Is that correct? Is there any special treatment for moving Inherited IRAs from one bank to another? Now that bank interest rates are slowly creeping up, after I turn 59 and a half I'd like to move some IRAs that are invested in CDs currently earning low interest rates. Are there any tax consequences if I do this? Will I have to file anything with the IRS when I move an IRA from one bank to another?

If I have four IRAs in four different banks, is there any rule against moving all of them in the same year?  Is there a limit on the number of times I can move each IRA in one calendar year?

Are there any penalties in "breaking" any of the IRA CDs before their maturity dates?

At what age can I take out some of my own IRA money without penalty? I know that any money I take from the traditional IRAs have to be reported on my tax returns. But am I right that I don't have to report my withdrawals from the Roth IRAs? --DM, via email

A: You don’t have to wait until you’re 59 and a half years old to move the IRAs you own from one provider to another without triggering any taxes or any tax penalty. An IRA owner can do that at any age.

It's not always possible for a beneficiary to move Inherited IRAs, however, as I’ll explain in a moment.

But even though there is no tax penalty, you may trigger a provider's early withdrawal penalty depending on how your IRA is invested.  A prime example is moving a CD before its maturity date. The only time banks waive this penalty -- and not all of them do -- is if you must ‘break’ a CD before maturity in order to take a required distribution from an IRA after you turn 70 and a half years old. 

You don’t have to file anything with the IRS when you transfer an IRA between providers. And there’s no limit to how many times you can move each IRA in a single calendar year – although moving four IRAs several times a year would require a high tolerance for filling out financial services providers’ paperwork.

The best way to move an IRA from one provider to another is in a trustee-to-trustee transfer: You want to move an IRA from Bank A to Bank B. You open a new IRA at Bank B, and then Bank B asks Bank A to transfer your IRA money into the new account.

Alternatively, you can take a check from Bank A and deposit it in a new IRA in Bank B. But in that case, to avoid taxes you must deposit the entire amount in a new IRA within 60 days. (This is called the 60-day rule.)

You can start withdrawing money from your own traditional IRAs without incurring a 10% early withdrawal tax penalty as soon as you turn 59 and a half. But the amount you withdraw is taxable income. (The IRA custodian reports IRA withdrawals to the IRS – so don’t omit it from your tax return in the hope that you can avoid paying taxes on it.)

Your Roth IRA withdrawals are all tax free after you turn 59 and a half and have owned the account for five years. You don't have to report them to the IRS.

Okay, so what about moving an Inherited IRA from one bank to another?

The IRS has no objection to your doing this, as long as you put the new Inherited IRA account in its original owner's name, listing yourself as the beneficiary. But occasionally, the bank’s rules don’t allow IRA beneficiaries to do a trustee-to-trustee transfer; this doesn't happen often, but it does happen. Unlike an IRA owner, an IRA beneficiary cannot use the 60-day rule to avoid taxes on a transfer. In other words, by refusing to allow trustee-to-trustee transfers, a bank with this rule makes it impossible for a beneficiary to move an Inherited IRA without triggering taxes.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved