As loved ones get older, it is becoming increasingly common that children, other family members, or close friends will step in to assist with many activities of daily living. This often involves assisting the individual with paying bills for personal, medical, and household expenses. The two most common methods for legally assisting an individual in financial matters are through a Power of Attorney or becoming a joint account holder. It is extremely important that everyone involved in assisting a loved one with financial matters understand the effect of each method on the individual’s estate plan and the disposition of financial assets after the individual’s death.
A Power of Attorney is a legal document whereby an individual (called the “Principal”) grants another person (called the “Agent”) legal authority to make decisions. Powers of Attorney can be for medical decisions, financial decisions, or both. The Principal retains legal authority to make his or her own decisions, but the Agent may act on the Principal’s behalf in instances where the Principal is unable to act. The form of a Power of Attorney varies from state-to-state; for instance, Pennsylvania recently overhauled its Power of Attorney laws effective January 1, 2015. In Pennsylvania, a Power of Attorney must be signed by the Principal and two witnesses in the presence of a notary public. The Agent must also sign an Acknowledgment in the presence of a notary public before he or she may take any actions on the Principal’s behalf.
A financial Power of Attorney is an extremely powerful document, as it gives the Agent broad authority with regard to the Principal’s finances. Whenever the Agent acts on behalf of the Principal, he or she should provide a copy of the Power of Attorney to the financial institution as evidence of the authority to act. So long as the Power of Attorney is validly executed, financial institutions are required by law to accept the Power of Attorney. Through the use of a valid Power of Attorney, an Agent can sign checks for the Principal, withdraw and deposit funds from the Principal’s financial accounts, change or create beneficiary designations for financial assets, and perform many other financial transactions.
It is important to note that the Principal’s financial assets are always considered to belong to the Principal, not the Agent. The Agent has a fiduciary duty to keep the Principal’s assets separate from his or her own funds and to only expend the Principal’s funds in the Principal’s best interests.
Joint ownership, the second method of assisting an individual with financial affairs, operates much differently than a Power of Attorney. Adding someone else to an individual’s financial assets as a joint owner can be done directly at each financial institution through the execution of any forms required by the institution. Upon the proper execution of these forms, both the original owner and new owner are considered joint account owners for the account. As joint owners, each owner has full access to the funds in the account and may make decisions concerning the account, such as signing checks, making deposits and withdrawals, and other transactions. It is important to note that most joint account owners may act individually or jointly; as such, one joint account owner may complete transactions for the account without the input or approval of the other joint owner.
Changing an account from individual ownership to joint ownership means that all joint owners are considered equal owners of the account, regardless of who actually contributed money to the account. As such, if an elderly parent adds one child onto a bank account as a joint owner, the funds in the account are considered to belong to both the parent and the child, even if the child never contributes any money to the account. As such, the child-joint owner could use the funds in the joint account for his or her personal needs. In addition, the act of adding a someone as a joint owner on a financial asset could be treated as a gift to that individual. This gift could prove problematic if the elderly parent seeks to qualify for long-term care through Medical Assistance within five years of making this gift.
It is important to note that there is a key distinction between adding an individual to a bank account as a joint owner and adding an individual to an account as an authorized signer. The authorized signer functions like an Agent under a Power of Attorney; as such, the authorized signer is not considered an owner of the account. In most cases, banks and other financial institutions add an individual to an account as a joint owner, not an authorized signer.
Assets that were managed through either a Power of Attorney or joint account operate very differently upon the death of the Principal or joint account owner, and it is important to understand the effects of each method on the decedent’s estate plan. The authority to act asthe Agent under a Power of Attorney ends at the Principal’s death; as such, the only person who will be able to make decisions concerning the Principal’s assets following the Principal’s death is the personal representative of his or her estate. This means that the Agent will not be able to use the Power of Attorney to access the Principal’s assets to pay for estate expenses, such as the Principal’s funeral. The personal representative of an estate is determined by the decedent’s Last Will and Testament or the laws of intestacy (if the decedent died without a Will); as such, the Agent may not necessarily be the personal representative of the estate. Because assets held by the Principal in his or her own name are not considered the Agent’s property, these assets will pass to the beneficiaries of the Principal’s Will (or according to the laws of intestacy) following the Principal’s death. In addition, the Pennsylvania Inheritance Tax will be assessed on the full value of the assets.
In contrast, Pennsylvania law provides that assets held in a joint account belong to the surviving joint owner(s) upon one joint owner’s death. As such, assets held in a joint account pass by operation of law to the surviving joint owner; the assets do not pass to the beneficiaries of the deceased joint owner’s Will (or the intestate heirs). The personal representative of the decedent’s estate will have no authority to take possession of these assets and use these assets to satisfy the debts, expenses, and taxes of the decedent. While the surviving joint owner could choose to use the funds in the joint account to pay for estate expenses (for example, the funeral bill), he or she is under no legal obligation to do so. Similarly, the surviving joint owner of an account may choose to gift the funds in the account to the estate’s beneficiaries, but has no legal obligation to make these gifts.
For purposes of the Pennsylvania Inheritance Tax Return, the joint account is divided into as many shares as there were joint owners just prior to the decedent’s death. The account is then taxed on the portion attributable to the decedent. For example, a joint account with two joint owners just prior to the decedent’s death (the decedent and the surviving joint owner) will be taxed on one-half of the value of the account. Therefore, even though the surviving joint account owner in this example inherits the entire value of the account, he or she only pays Pennsylvania Inheritance Tax on fifty-percent of the account. However, if an asset is transferred from individual ownership to joint ownership within one year of the decedent’s date of death, the asset is taxed on its full value.
An example may best illustrate the differences between the effect of a Power of Attorney and joint account ownership at death. Suppose that a mother executes a Will that divides her residuary estate among her three children. At the time of her death, the mother owns a house, a savings account, and a checking account. Several years before her death, the mother added her eldest child to the savings account and checking account so that the eldest child could pay bills for the mother from these accounts; she did not add her other two children to these accounts. By jointly-titling the savings and checking accounts, the ownership of these assets will pass by operation of law to the eldest child upon the mother’s death. Since the house remained titled solely in the mother’s name, it is the only asset that will be distributed according to the terms of the mother’s Will. Therefore, the eldest child will receive full ownership of the savings and checking accounts, plus one-third of the value of the house; the other two children will receive the remaining two-thirds of the house. Unless the eldest child chooses to use the account money to pay for the inheritance taxes and administrative fees of the estate, the house may need to be sold so that the estate has sufficient liquid assets to pay these taxes and fees. This plan may not have the effect that the mother intended; if she intended on leaving her estate to her children equally, she would not be doing so.
In contrast, suppose in the example above that the mother did not add her eldest child as a joint owner of the savings and checking accounts, but rather executed a Power of Attorney naming the eldest child as Agent to allow the eldest child to assist the mother with paying her bills. At the mother’s death, the savings account, checking account, and house will all be divided equally among all three children according to the terms of the mother’s Will.
As illustrated above, the disposition of an estate is greatly affected by the use of Powers of Attorney and joint accounts. Care should be taken in determining whether a Power of Attorney or joint account will be the best method to allow a family member or friend to assist another with financial affairs.
