This article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
Introduction
Joint bank accounts are confusing, and no one is more confused than the banks themselves. The Texas legislature has blessed seven specific account agreement forms, in hopes of offering consumers clear choices to avoid probate and plan for disability. Unfortunately, most banks use different forms, which either omit one or more Texas account options or else use out-of-state language. Bank customers are too often left guessing as to their options and whether an account agreement would mean the same thing to a Texas court as it does to the bank.
Executive Summary
If you are fortunate enough to bank where the Texas forms are offered, the Convenience Account, form (6), is the most practical: it permits single or joint ownership, it does not avoid probate, but it does offer disability planning. Although other accounts may purport to avoid probate, that feature is defeated if the bank cannot find your complete signature card and account agreement or if it used custom language that does not meet Texas’ requirements. As a rule of thumb, convenience accounts good, P.O.D. accounts bad, survivorship accounts worse.
Discussion
Banks offer accounts to avoid probate and plan for disability, so depositors can manage their business without wills or powers of attorney. Joint ownership allows friends or family to sign checks. Survivorship gives an account to the remaining joint owners. P.O.D. (pay on death) accounts go to a designated beneficiary that was not an owner.
In 1993, Texas promulgated the Uniform Single-Party or Multi-Party Account Selection Form (reproduced below). It provides model signature cards for ownership, survivorship, and P.O.D. accounts, a convenience account, and a trust account. Other forms, not all valid under Texas law, remain common, especially at out-of-state banks and on accounts opened before 1993.
The convenience account works well for disability planning. However, joint, survivorship, and P.O.D. accounts generally should not be used as will substitutes.
The convenience account lets others write checks for the owner. When the owner dies, the convenience signer receives nothing. This account is for disability planning, and does not avoid probate. Ironically, this makes it the only joint account reliable enough for estate planning, because the owner can be certain it passes according to the will.
Joint, survivorship, and P.O.D. accounts tend not to be tested until an owner dies. Too often, only then is it discovered that the bank lost the agreement, used the wrong form (is your bank from Texas?), or misfiled a signature card. In those cases, the account goes through probate, disinheriting surviving owners and P.O.D. payees. Auditing the account during the owner’s life is a thankless task, because the next merger just gives the bank another chance to lose its records.
Convenience accounts work well, but avoid joint, survivorship, and P.O.D. accounts.
We sometimes recommend joint ownership without right of survivorship to our clients, but only as part of a comprehensive estate plan, and only after understanding the account agreements used by the particular bank or broker.
Tax Considerations
Estate taxes are an issue whenever any owner or beneficiary may leave a taxable estate ($10,000,000 in 2018 through 2025, down to $5,000,000 in 2026, all indexed for inflation since 2011). Joint ownership with right of survivorship has the worst estate tax attributes of all the forms of multiple ownership, and should generally be avoided. Joint owners may be taxed on 100% of the value of the account, regardless of their actual contribution. This means the same dollars may be taxed every time a joint owner dies, an especially bad result when joint owners come from the same generation.
Survivorship and P.O.D. accounts are the enemy of tax-planned trusts, because the account balance is paid directly to an individual beneficiary rather than the trustee. If the same account went through probate, a well-drafted will could place all or part of the account balance into a tax-planned trust. Survivorship and P.O.D. accounts can leave estate tax dollars on the table on the death of the beneficiary, undoing the good planning in a thoughtful, tax-planned will. The pain isn’t felt immediately, but only on the death of the beneficiary, and so it escapes notice by most families.
An immediate penalty can be inflicted by survivorship and P.O.D. accounts where the deceased owner left a surviving spouse but made someone else the beneficiary, for example, where Dad named children beneficiaries rather than Stepmom. Had Dad instead left the money to Stepmom, his surviving spouse, an unlimited marital deduction would shield the account from estate taxation, but not so when it goes to the children instead. The children may prefer that, especially if Dad’s will leaves Stepmom responsible for the taxes, but that is an ugly result and seldom what Dad intended.
Even the moderately wealthy husband and wife should refuse survivorship and P.O.D. features, except on the smallest accounts. For example, survivorship rights on an account for household expenses can make sense, but a jumbo CD generally should not be set up as a joint account with right of survivorship or as a P.O.D. account.
Uniform Single-Party or Multi-Party Account Selection Form
Texas’ uniform account selection form appears below, reprinted verbatim from Section 113.052 of the Texas Estates Code. Account (6), the Convenience Account, is the most practical form of ownership: it provides disability planning, but does not avoid probate. Survivorship and P.O.D. features are nice in theory, but in practice are just too unreliable, given the frequency of incorrect forms, missing signature cards, and lost account agreements. Those same problems might plague use of the Convenience Account, except that it can be tested during an owner’s lifetime, while there is still an opportunity to cure any problems with a new signature card.
UNIFORM SINGLE-PARTY OR MULTIPLE-PARTY ACCOUNT SELECTION FORM NOTICE: The type of account you select may determine how property passes on your death. Your will may not control the disposition of funds held in some of the following accounts. You may choose to designate one or more convenience signers on an account, even if the account is not a convenience account. A designated convenience signer may make transactions on your behalf during your lifetime, but does not own the account during your lifetime. The designated convenience signer owns the account on your death only if the convenience signer is also designated as a P.O.D. payee or trust account beneficiary.
Select one of the following accounts by placing your initials next to the account selected:
___ (1) SINGLE-PARTY ACCOUNT WITHOUT “P.O.D.” (PAYABLE ON DEATH) DESIGNATION. The party to the account owns the account. On the death of the party, ownership of the account passes as a part of the party’s estate under the party’s will or by intestacy.
Enter the name of the party:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
___ (2) SINGLE-PARTY ACCOUNT WITH “P.O.D.” (PAYABLE ON DEATH) DESIGNATION. The party to the account owns the account. On the death of the party, ownership of the account passes to the P.O.D. beneficiaries of the account. The account is not a part of the party’s estate.
Enter the name of the party:
Enter the name or names of the P.O.D. beneficiaries:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
___ (3) MULTIPLE-PARTY ACCOUNT WITHOUT RIGHT OF SURVIVORSHIP. The parties to the account own the account in proportion to the parties’ net contributions to the account. The financial institution may pay any sum in the account to a party at any time. On the death of a party, the party’s ownership of the account passes as a part of the party’s estate under the party’s will or by intestacy.
Enter the names of the parties:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
___ (4) MULTIPLE-PARTY ACCOUNT WITH RIGHT OF SURVIVORSHIP. The parties to the account own the account in proportion to the parties’ net contributions to the account. The financial institution may pay any sum in the account to a party at any time. On the death of a party, the party’s ownership of the account passes to the surviving parties.
Enter the names of the parties:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
___ (5) MULTIPLE-PARTY ACCOUNT WITH RIGHT OF SURVIVORSHIP AND P.O.D. (PAYABLE ON DEATH) DESIGNATION. The parties to the account own the account in proportion to the parties’ net contributions to the account. The financial institution may pay any sum in the account to a party at any time. On the death of the last surviving party, the ownership of the account passes to the P.O.D. beneficiaries.
Enter the names of the parties:
Enter the name or names of the P.O.D. beneficiaries:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
___ (6) CONVENIENCE ACCOUNT. The parties to the account own the account. One or more convenience signers to the account may make account transactions for a party. A convenience signer does not own the account. On the death of the last surviving party, ownership of the account passes as a part of the last surviving party’s estate under the last surviving party’s will or by intestacy. The financial institution may pay funds in the account to a convenience signer before the financial institution receives notice of the death of the last surviving party. The payment to a convenience signer does not affect the parties’ ownership of the account.
Enter the names of the parties:
Enter the name(s) of the convenience signer(s):
___ (7) TRUST ACCOUNT. The parties named as trustees to the account own the account in proportion to the parties’ net contributions to the account. A trustee may withdraw funds from the account. A beneficiary may not withdraw funds from the account before all trustees are deceased. On the death of the last surviving trustee, the ownership of the account passes to the beneficiary. The trust account is not a part of a trustee’s estate and does not pass under the trustee’s will or by intestacy, unless the trustee survives all of the beneficiaries and all other trustees.
Enter the name or names of the trustees:
Enter the name or names of the beneficiaries:
Enter the name(s) of the convenience signer(s), if you want one or more convenience signers on this account:
ACKNOWLEDGMENT: I acknowledge that I have read each paragraph of this form and have received disclosure of the ownership rights to the accounts listed above. I have placed my initials next to the type of account I want.
_______________________
Signature