Investor Column | Avoiding the headaches of joint ownership

Parents often regret adding adult children to bank and brokerage accounts. Ensuring continuity with banks and financial service companies for sickness and incapacity is often ripe with peril. What is initially convenient can cause significant problems on the back end.

Take Veronica, age 75, for example. She is planning on adding her 57-year-old daughter Mary Beth to a $125,000 bank account.

“Are you sure this is a good idea, Veronica?” I ask.

“No problem,” she says. “I trust Mary Beth.”

“But what happens when you pass away?”

“Mary Beth will distribute equal shares to my other two children, Richard and Jane,” she responds.

Now I need to tread delicately. I do not want Veronica to make a bad financial mistake and, to be frank, rub her the wrong way and motivate her to change financial advisors.

So, here is what I am thinking to myself, “This is a terrible idea, Veronica, because Mary Beth legally doesn’t have to share these funds with her siblings at death.” Despite the risk of irritating Veronica, I do the right thing and speak up:

“Maybe a better strategy is to provide Mary Beth with a Power of Attorney form,” I say. “This allows your daughter to transact business for you, subject to prudent parameters. A Power of Attorney Form ends at death, however.

There are other risks to consider. Most states feel funds in the account are joint and owned fifty-fifty. Legally a child could remove funds in the account 100% at his or her discretion.

Joint accounts have liability issues. Litigation can lead to capturing funds in an account. Money in the account could support claims when adult children divorce or have creditor issues. Logically if the funds in the account are available to your child, the funds can be subject to creditors and divorcing spouses, too.

I’ve found most bank employees to be pretty good at opening accounts, but they’re not lawyers. Avoid complacency when titling stocks and bonds too. Despite your best intentions, some investment advisory firms might make mistakes when rushing to open an account as a joint. It is your responsibility to title your accounts to protect your wishes adequately.

For this scenario, a better strategy might allow a son or daughter special authority to sign on to the checking account. A child can access the money to pay bills but cannot use funds for their benefit. The child’s creditors usually cannot get access to this money, either.

Banks often prefer not doing this because they have difficulty, due to technology, validating names on checks. Joint accounts are encouraged because they do not have to review signature cards or redundant tech verifications.

Are you concerned about simplifying or avoiding probate? A strategy of adding payable on death restrictions to the account resembles the concept of a life insurance beneficiary. Money may then go directly to your choice, and that isn’t part of court probate.

People often do some insane things when going into business with an inappropriate partner. Years ago, a friend bought a home with an intrinsic “fiancé,” significant other. The goal was to buy the house, 50%, 50%

After my friend signed a purchase contract, his sweetheart says, “I’m not going to be able to do this financially because “I have bad credit.”

Now my friend went forward and bought the home individually. He ended breaking up with his “sweetie” and was left holding property that was more than he could afford. He now regrets buying this home despite once-great intentions like, “I’m in love, and moving forward to a more meaningful commitment.”

Partnerships are like being married. There are, obviously, good marriages and bad marriages. As many of you likely know, avoiding a bad marriage is smart. Your odds are better for success if you buy one hundred percent of an investment, rental property, or business -- if you can afford it. Avoid the headache of fighting about money and managing with close friends and relatives. They can be a massive pain in the ass. Flying solo usually has fewer complications.

For example, fights might occur when pricing rents for a rental property. “I don’t want to chip in $10,000 for a new heating system because cash is tight for my family,” says your college roommate, who stood up for your wedding. “Sorry, we have to do it by law,” you respond, hoping the county won’t condemn your “joint” property.

It has been my experience that fortunes, friends, and attitudes change. A partner, maybe even a lifelong friend, can lose a job, cash out an ex-spouse, or struggle with paying tuition for three kids. Relationships change; what about a vacation home that one party wants to use personally for three weeks in a season when it could rent for $6,000 a month?

I believe it is often stupid for unmarried couples to buy property together. (Maybe some married couples, too) Don’t do it. But if you must, create a substantial buy-sell agreement and a prudent partnership or LLC operating agreements.

Jim Germer is a Bradenton CPA and financial adviser at 3655 Cortez Road W, Suite 110, Bradenton Florida 34210. Call (941) 746-5600 or email jim.germer@ceterafs.com. Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency) member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. Cetera entities are under separate ownership from any other named entity. This article is designed to provide accurate and authoritative information of the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. Neither Cetera nor its affiliates offer tax or legal services. The hypothetical situations are for illustrative purposes only and should not be deemed a representation of past or future results.