Many people want their estates to pass without going through probate, and the courts and legislatures have recognized many means of placing property in forms that do not require probate. Among these are joint bank accounts, payable on death accounts, and “Totten” trust accounts (named after a New York case that first approved this form). These account forms will usually work to pass property quickly without probate. All of them have disadvantages, however, and none of them will prevent the accounts from being counted when calculating estate taxes. This means that before using any of these accounts, it is probably a good idea to familiarize yourself with how they work and decide whether they meet your needs.
In general, poorly planned and documented joint accounts, payable on death accounts and Totten trust accounts can be the cause of big fights after the death of the account holder. Among the potential problems are unexpected inequality of distribution and unexpected treatment of accounts intended for convenience as joint accounts. It can be difficult and expensive to prove that one of these accounts was not intended to pass as the law usually provides, so mistakes often are allowed to pass. This means that before one of these accounts is set up, careful planning is a good idea.
A joint account is exactly what it sounds like. Two or more people are named as the account holder, and any of them can deposit or withdraw from the account. In Oregon, when one of the account holders dies, the survivors get the balance unless it can be proven that the account holders intended otherwise or that the deceased account holder was incapacitated at the time the account was created.
In Washington, a joint account may be with or without survivorship. In a joint account without survivorship, when one of the account holders dies, that person’s share goes to his or her estate. In a joint account with survivorship, the same rule applies as in Oregon.
In both Oregon and Washington, joint accounts are treated as held proportionately by the joint holders based on the ratio of contributions. If each contributes half, each owns half. This rule can be changed only by proving to the court that the account holders intended something different, and the person claiming a different intent has to provide evidence showing a high probability of that intent. Washington allows ownership interests to be modified by the deposit agreement with the bank. Gift and estate taxes require a calculation of percentages.
Joint accounts are particularly useful for married couples and domestic partnerships, but if either spouse or partner has reason to suspect the other will drain the account, it probably is not a good idea.
The most significant problem with using joint accounts is that placing two people’s names on an account solely for convenience may lead to unintended disputes. First, an unscrupulous second account holder can drain the account. If it can be shown that the intent was that the second person’s name was on the account only for convenience, the courts may require the money to be restored, but there is no guarantee that the court will rule that way or that the money can be recovered after judgment. Second, a convenience account must be well documented. If it cannot be shown that there was no intent to leave the balance to the second account holder, the bank will probably pay the balance on the death of the first account holder. It may be safer to set up a trust or give someone power of attorney for a specific purpose, both of which impose fiduciary obligations and provide more protection and clarity.
Payable on Death Accounts
A payable on death account names one or more persons as the original account holders, with a beneficiary named to receive the balance on the death of the last original account holder. The original account holders may deposit and withdraw freely.
In both Oregon and Washington, if more than one payee is named, but one dies before the original account holder, the surviving payees receive the account when the original account holder dies. If more than one payee survives the original account holder, they share the balance unless the account specifically states that only the last survivor may take the account.
The original account holder is treated as the owner during his or her lifetime. Estate taxes are calculated only on the balance.
A Totten trust account lists one or more persons as trustee for another, without an underlying trust agreement. The courts have treated this as creating a tentative trust, effective only at the death of the last trustee, at which time the other person receives the balance. The trustee is able to deposit and withdraw freely and is not required to account to the beneficiary, as withdrawals are considered the same as revoking the trust as to the amount withdrawn.
In Oregon, if more than one beneficiary is named, but one dies before the trustee, the surviving beneficiaries receive the account when the original account holder dies unless it can be proven that the trustee intended a different result. The evidence to prove a different intent must show high probability. If more than one beneficiary survives the original account holder, they share the balance unless the account specifically states that only the last survivor may take the account.
Not all states will recognize Totten trusts. In Oregon, it is called simply a “trust account,” but the bank may need to be informed that a Totten plan is intended to ensure that it not be confused with an account for a living trust. The funds are treated as belonging to the trustee during his or her lifetime, and estate taxes are calculated on the balance.
Washington treats a Totten trust as simply a form of payable on death account and uses payable on death rules.
The main disadvantage of a Totten trust is lack of flexibility if the trustee becomes incapacitated. Because there is no trust document, there is no way to remove the trustee without a court order. Preparing a revocable trust document that follows a Totten plan can get around this problem, but that means expense that a simple Totten designation is intended to avoid.
Effect on Wills
In both Oregon and Washington, joint accounts with survivorship, payable on death accounts, and Totten trust accounts pass separately from the account holder’s estate and are not affected by a will. This must be considered in preparing the will, particularly if it may result in a disproportionate distribution.
Effect of Community Property in Washington
In Washington, community property rights of a married (or domestically partnered) person in an account held by the spouse or partner are not affected, so only that part which does not go to the spouse or partner on death passes under a bank account designation. This makes these accounts less useful for estate planning than in Oregon.
Vulnerability to Debt Claims
Assets passing outside probate generally are not protected from claims for debts. For example, all of the accounts described in this article may be used to pay loans and other debts to the bank when the account holder dies. Similarly, a creditor may be able to reach an account regardless of whether the usual procedure for making claims in probate is followed.
Although joint accounts, payable on death accounts, and Totten trust accounts are useful tools for passing property outside of probate, they are not for everybody. If you want to use one of these accounts, you should carefully consider whether there is likely to be a dispute after your death, whether you are likely to leave debts that need to be covered, and whether your estate is likely to be large enough to be taxed. You should also discuss your plans with a lawyer and your banker so that if you use one of these accounts, it is properly documented and so that the rest of your estate plan takes these accounts into consideration.