Do You Need Power of Attorney If You Have a Joint Account?

Clients often, sometimes at the suggestion of their bankers, add names onto accounts to make money accessible upon the incapacity or death of a parent.  This often leads them to assume they don’t need a Power of Attorney (POA), and they don’t realize that Powers of Attorney are designed to permit access to accounts upon incapacity of a parent. There are some pros and cons of doing this in either way, as discussed in the article “POAs vs. joint ownership” from NWI.com.

The POA permits the agent to access their parent’s bank accounts, make deposits and write checks.  However, it doesn’t create any ownership interest in the bank accounts. It allows access and signing authority.  This is usually what individuals are thinking of when they create these accounts.

If the person’s parent wants to add them to the account, they become a joint owner of the account. When this happens, the person has the same authority as the parent, accessing the account and making deposits and withdrawals.

However, there are downsides. Once the person is added to the account as a joint owner, their relationship changes. As a POA, they are a fiduciary, which means they have a legally enforceable responsibility to put their parent’s benefits above their own.  As an owner, they can treat the accounts as if they were their own and there’s no requirement to be held to a higher standard of financial care.  You can see the following article for more on this point.  https://galligan-law.com/effect-of-adding-someone-to-your-bank-account/

Because the POA does not create an ownership interest in the account, when the owner dies, the account may pass to the surviving joint owners, Payable on Death (POD) beneficiaries or beneficiaries under the parent’s estate plan.

It also avoids the creation of a gift, which may have estate tax or Medicaid ramifications.

If the account is owned jointly, when one of the joint owners dies, the other person becomes the sole owner.

Another issue to consider is that becoming a joint owner means the account could be vulnerable to creditors for all owners. If the adult child has any debt issues, the parent’s account could be attached by creditors, before or after their passing.  I worked closing on a case with the opposite scenario, a creditor a parent collected money that otherwise would have gone to the children.

Most estate planning attorneys recommend the use of a POA rather than adding an owner to a joint account. If the intent of the owners is to give the child the proceeds of the bank account, they can name the child a POD on the account for when they pass and use a POA, so the child can access the account while they are living.

One last point: while the parent is still living, the child should contact the bank and provide them with a copy of the POA. This, allows the bank to enter the POA into the system and add the child as a signatory on the account. If there are any issues, they are best resolved before while the parent is still living.

Reference: NWI.com (Aug. 15, 2021) “POAs vs. joint ownership”

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Five IRA Rollover Mistakes to Avoid

Making a mistake when rolling your 401(k) to an IRA could result in unexpected taxes and possible penalties.
Making a mistake when rolling your 401(k) to an IRA could result in unexpected taxes and possible penalties.

Recent changes in the job market have led to an increase in IRA rollovers, but at the same time, people are making more mistakes when transferring their employer related retirement accounts to an IRA, reports The Wall Street Journal in a recent article, “The Biggest Mistake People Make With IRA Rollovers.” These IRA rollover mistakes may result in additional taxes and penalties.

Done properly, rolling funds from a 401(k) to a traditional IRA offers you more flexibility and control. A company retirement plan may limit you to a half-dozen or so investment choices; but, depending on the IRA custodian, the IRA owner may choose investment options ranging from stocks and bonds to mutual funds, exchange-traded funds, certificates of deposits or annuities.

However, if you are considering rolling over an employer related retirement plan to an IRA, make sure to avoid these common IRA rollover mistakes:

Mistake #1:  Taking a lump-sum distribution of the 401(k) funds instead of moving the funds directly to an IRA custodian. The clock starts ticking when you do what’s called an “indirect rollover.” Miss the 60-day deadline and the amount is considered a distribution, included as gross income and taxable. If you’re younger than 59½, you might also get hit with a 10% early withdrawal penalty.

There is an exception: if you are an employee with highly appreciated stock of the company that you are leaving in your 401(k), it’s considered a “Net Unrealized Appreciation,” or NUA. In this case, you may take the lump-sum distribution and pay taxes at the ordinary income-tax rate, but only on the cost basis, or the adjusted original value, of the stock. The difference between the cost basis and the current market value is the NUA, and you can defer the tax on the difference until you sell the stock.

Mistake #2:  Not realizing when you do an indirect rollover, your workplace plan administrator will usually withhold 20% of your account and send it to the IRS as pre-payment of federal income tax on the distribution. This will happen even if your plan is to immediately transfer the money into an IRA. If too much tax was withheld, you’ll get a refund from the IRS.

Mistake #3:  Rolling over funds from a 401(k) to an IRA before taking a Required Minimum Distribution or RMD. If you’re required to take an RMD for the year that you are receiving the distribution (age 72 and over), neglecting this will result in an excess contribution, which could be subject to a 6% penalty.

Mistake #4:   Rolling funds from a 401(k) to a Roth IRA and neglecting to pay taxes immediately. If you move money from a 401(k) to a Roth IRA, it’s a conversion and taxes are due when you make the transfer. However, if you have some after-tax dollars left in the 401(k), you can make a tax-free distribution of those funds to a Roth IRA.

Mistake #5:  Not knowing the limits when moving funds from one IRA to another, if you do a 60-day rollover. The general rule is this: you are allowed to do only one distribution from an IRA to another IRA within a 12-month period. Make more than one distribution and it’s considered taxable income. Tack on a 10% penalty, if you’re under 59½.

Reference: The Wall Street Journal (Oct. 1, 2021) “The Biggest Mistake People Make With IRA Rollovers”

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What Happens to Your Will if You Get Divorced?

It is especially important to review your estate plan in a divorce situation.
It is especially important to review your estate plan in a divorce situation.

Every time you experience a life changing event, including divorce, it’s time to revisit your Will to make sure there are no unpleasant surprises for you or your family. As reported in the article “Rewriting Your Will After Divorce” from Investopedia, failing to review your current estate plan when contemplating a divorce can lead to results that you never intended.

Texas Law Can Save You

Luckily, in Texas we have several laws that cover you if you forget or don’t get around to writing your ex spouse out of your Will. Texas law presumes that after a divorce you do not want a former spouse to be a beneficiary under your Will or to act as your executor or agent under a power of attorney to make financial or medical decisions for you.

In fact, if you do want your former spouse to be your executor or agent, you need to reappoint them in new estate planning documents you execute after the divorce.

One thing to remember is that if your ex is a parent of your children, you will not be able to eliminate him or her as a guardian of your children if something happens to you while they are minors. The only way the other parent will not be allowed to be guardian of his or her child is if the parent is found unsuitable.

But you should still execute a new designation of guardian for your minor children in case your ex who is the parent is deceased or is found to be unsuitable to be guardian.

So, Where’s the Problem?

What if you pass away before the divorce is final? The law only applies to a divorced spouse, not if you are only separated or waiting for the divorce to be final. That’s why it’s a good idea to change your estate planning documents when you’re contemplating a divorce.

Issues With Some Retirement Plans

Also, Texas law cannot override a very harsh US Supreme Court case holding that state law does not apply to employer related retirement plans, such as 401(k)’s and 403(b)’s. These kinds of retirement benefits are subject to federal law which supersedes state law.

This US Supreme Court case, Egelhoff v Egelhoff, was decided in 2001. Mr. Egelhoff, an employee of Boeing Company, had a pension and life insurance policy that was provided by his employer.

Mr. Egelhoff, died in a car accident two months after his divorce, but before he changed the beneficiaries on his retirement and company life insurance.  Though the company still listed Mr. Egelhoff’s ex-wife as beneficiary, Mr. Egelhoff’s children by a previous marriage claimed that he had every intention of removing their stepmother as beneficiary and naming them, his children, as beneficiaries. That would seem to make sense given the circumstances.

Mr. Egelhoff’s children sued their father’s ex-wife for the retirement benefits and the life insurance, claiming that there was no way their father wanted his ex-wife to have the benefits to the detriment of his children.

The Court said that, under federal law, the company’s plan documents control who the beneficiary is and that the benefits would be distributed to the person who was listed with the company as beneficiary at the time of death, even if the beneficiary had been recently divorced from the employee.

The moral of the story is to make sure that beneficiaries on company related benefits are changed immediately after divorce to avoid the unfair result that happened to the Egelhoff children. State law cannot save you in that situation.

What’s Our Takeaway from This?

Every time there is a major life event (divorce, death of a family member, marriage, increase or decrease in wealth, illness, etc.) it is time to review your estate plan to make sure that it reflects what you want and need now. If you wait too long, things may not work out the way you want them to for your family and yourself.

Reference: Investopedia (September 14, 2021) “Rewriting Your Will After Divorce”

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