Legal Tip 430: Estate Planning Issues with Offsets on Joint Loans

There are important estate planning issues to consider with offset accounts, especially offset accounts in joint names as generally a bank account will be held as joint tenants and the surviving account holder will become the owner of all of the cash in that offset account.

This can change the outcomes under estate planning and what passes via the will of the deceased person.


Example

Homer and Marge keep their finances totally separate. They each have kids from a previous relationships and when they die they want to leave their own assets to their kids.



They have several properties with loans and with the recent tightening up of lending they can only access the equity of their properties by jointly borrowing against them.



Homer has a property worth $1,000,0000 with a $500,000 loan on it. He wanted to borrow another $300,000 for investing in shares, but he didn’t qualify so he got Marge to come in as a co-borrower.

The loan was then in 2 names. Offset accounts were set up and Homer was the sole person to use the offset account but it was in both names to match what was on the loan.

Time passed and the offset became larger and was fully offset with $800,000.

Homer died.

His will left everything to his 8 children. But because the offset account was joint, it was held as joint tenants. That meant the money in the offset account didn’t pass via Homer’s will. It went to the surviving joint owner – Marge in this case.

Each of Homer’s children missed out on $100,000 while Marge went on a first-class trip on the new Space X rocket to Mars.


(note that as the spouse Marge would have been entitled to make a Family Provision claim anyway, but that doesn’t necessarily mean she would have received any more provision.)

 

This also closely relates to another Legal tip

Legal Tip 244: Death Offset Accounts with Loans fully offset

 

Large amounts in joint offset accounts can reduce the amounts that end up in a TDT on the death of one of the account holders. Rarely considered by testators

 

If one party to the joint account transfers money into a sole name account, then dies, does the other party to the joint account have any ability to claw back?

 

Yes

 

That question reminds me of the case where grandma started having trouble operating her bank account and her young grandson came in to help out, they opened a joint bank account so he could help operate it. But then grandma died with over $800,000 in the bank. Grandson become the sole owner of that money at law - but equity came in and saved the day as it would have been unjust for him to take it all under the right of survivorship. He was deemed to be holding the money as trustee for the grandma and it therefore passed via her will.