The time has come to address one of my biggest pet peeves, because it is relevant year-round, and despite providing lectures to banks about all the pitfalls, they still allow their customers to establish joint accounts with someone other than their spouse.

Let me start by noting that a joint account with your spouse is fine; and in fact, preferred, in many respects. For instance, Virginia allows spouses to own property as Tenants By the Entireties (TBE), which is similar to joint with rights to survivorship titling, but it is only available to a married couple. By titling an account as TBE, the owners can take advantage of a simple (though not flawless) form of creditor protection. However, TBE titling with a spouse is not generally problematic; rather, it is titling an account with someone other than a spouse that can cause a number of problems.

In most cases, the scenario starts innocently. For example, an elderly person walks into a bank and tells the teller they want their daughter to sign checks on their behalf. Thereafter, the teller adds the daughter’s name to the account so she can sign checks. We now have a joint account, and the daughter is considered an owner of that account. In most cases, this joint account will also avoid probate, which is another objective of the elderly person. This all sounds great – after all, we just avoided probate and negated the need for a power of attorney, right?

Unfortunately, this is where things can start to go horribly wrong. After all, the daughter is now an owner of the account, so let’s consider a few scenarios:

What happens if the daughter is in a car accident and gets sued, or has other creditors?

The funds in the account are at risk since the daughter is now an owner. While it may be possible to get the funds discharged from the claim, doing so will require the assistance of an attorney, which can get very expensive.

What happens if the daughter withdraws funds from the account?

The daughter can withdraw funds at any time since she is an account owner. However, when she withdraws funds there may be a gift that either falls under the annual gift tax exemption of the parent, or requires the filing of a gift tax return.

What happens if the daughter’s spouse withdraws all the funds from the account using a power of attorney over daughter?

This could be done legitimately, or maliciously; but either way, the bank will honor the spouse’s power of attorney and allow the withdrawal. In addition to the gift tax concerns above, the elderly person will be left to sue the daughter’s spouse, and may or may not win that suit.

What happens if the parent has to qualify for Medicaid?

Joint accounts can impact Medicaid eligibility, as most states assume the applicant owns the entire account regardless of the number of names on the account. Transferring money out of the account may also be problematic, as it may fall within the look-back period for Medicaid disqualification.

What happens if the elderly person wants to close the account?

The co-owner of the account must execute the account closure paperwork.

These are just a few examples of how joint ownership of a checking, savings, or brokerage account can go horribly wrong. The good news is that it is relatively easy to avoid all these problems by using signature authority, a properly crafted power of attorney, or a trust. Granting signature authority on an account is simple at most banks, and it is free. While a grant of signature authority is not a perfect solution (signature authority terminates at the death of the account owner, and does not avoid probate), it is still a better option than joint titling. A properly crafted power of attorney or trust agreement can offer a much more comprehensive solution, but it can take some time and effort to ensure this is done correctly; and this is where a competent estate planning attorney can provide invaluable assistance.

Speaking to an attorney or accountant who is well-versed in tax law will help you make the right decisions for your business and personal real estate investments. To learn more, please visit our Estate Planning & Administration page, or call Chuck McWilliams at (703) 680-4664.

A recent Fairfax County Circuit Court decision is a reminder that under Virginia law, if you or your company pays a demand “voluntarily,” you will not be able to seek reimbursement of those amounts, even if they were charged illegally or were unreasonable. Pursuant to a long-standing rule known as the “Voluntary Payment Doctrine,” where a party pays an illegal demand with knowledge of the facts which render it illegal, such payment is deemed “voluntary” and cannot be recovered back, even if the payment was made under protest, unless certain limited exceptions apply. In Boyer v. Cambra, CL2017-14969 (Fairfax March 15, 2018), the court applied the Doctrine and prevented a debtor from recovering attorneys’ fees she paid as part of the payoff of a secured promissory note, even if the fees were unreasonable.

After defaulting on a promissory note secured by her home, the borrower in Boyer agreed to sell the house to pay off the debt. Prior to closing with a third party purchaser, the borrower received a payoff amount from the lender, which included $23,702.02 in attorneys’ fees. The debtor believed the fees were unreasonable and she attempted to negotiate them but was unable to reach an agreement with the lender. Although the debtor felt the fee was unreasonable, she did not want to breach the purchase agreement with the third party purchaser and therefore paid the full amount, under protest, at closing. She subsequently sued the lender seeking repayment of all or a portion of those fees and attempted to argue the fees that she paid were unreasonable.

The debtor recognized that the Voluntary Payment Doctrine presented a problem for her case, and she asserted that one of the Doctrine’s exceptions applied. Specifically, she argued that there was “an immediate and urgent necessity” for paying the fees because the lender had threatened to foreclose on her home. The court, however, rejected this claim because it found that the debtor had options other than paying the fee, including bringing suit prior to closing or interpleading the funds prior to the foreclosure. The court closely scrutinized the debtor’s actions and her options prior to paying the fee. In addition, the court reiterated well-established Virginia law that paying the fee under protest does not render the payment involuntarily.

This ruling highlights that when a party is faced with a demand that it believes is illegal or unreasonable, that party must exhaust all of its options to dispute the fee prior to making the payment, including filing suit. The party cannot simply protest the fee, make the payment, and then challenge the legality or reasonableness of the fee at a later date. Even where there is a bona fide argument that the fee is unreasonable, such an argument must be raised prior to paying the fee, otherwise the argument is lost.

If you or your company believes a demand is illegal or unreasonable, it is important to consult an advisor to discuss all options prior to paying it. In most circumstances, once the payment is made, it will be impossible to challenge the payment.

For more information please consult our Business Transactions attorneys.