Advisor at Risk

Ellen Bessner

Ellen Bessner is a well known, leading litigator with commercial litigation firm Babin Bessner Spry LLP. Her more than 20 years of experience includes defending investment and insurance industry participants, including dealers and individuals at all levels of courts.

Advisors have an obligation to inform elderly clients of the many risks with transferring an account to be held jointly to avoid probate fees

By Ellen Bessner |

Many advisors are under the mistaken belief that it's good advice for elderly clients to move their assets into a joint account with their ultimate beneficiary in order to avoid probate fees after they pass away. However, these advisors may be ill informed and could be exposing themselves to liability if they make such a recommendation.

If the client does not have capacity, there should not be a change in ownership of his or her account while the client is alive. That's because the client needs to make a well-informed decision. Dementia or other illnesses may render the client incapacitated so that the client is unable to comprehend and consider the implications of moving his or her assets into a joint account. However, if a client does have capacity, advisors have the obligation to fully inform the client of the many risks associated with transferring an account to be held jointly before death.

To explain those risks in greater detail, let's consider the case of Rosa, an 80-year-old mother, whose 55-year-old son Mikka wants her to move the account to be held jointly with him for "convenience":

1. When assets are held in a joint account, the assets become owned 100% by both people. That means either person can instruct the advisor to redeem and withdraw all the money in the account. Therefore, if Rosa's account is held jointly with Mikka, Mikka can withdraw all the money in the account — without Rosa's knowledge or consent. He just calls and instructs the advisor accordingly and the advisor is obliged to follow Mikka's instructions.

2. All assets held jointly are subject to both joint owners' creditors as both Rosa and Mikka own the assets. Therefore, if Mikka has any debts, the jointly held assets could be seized to satisfy his debts.

3. The jointly held assets are considered "family property" of both joint holders. So, if Mikka gets divorced, these assets, which Rosa previously owned fully on her own, will be considered part of the family property of Mikka and his spouse.

4. There are tax implications to consider. If there is a move to joint owner from sole owner, there's a change of ownership that triggers a deemed disposition, which has tax implications. So, clients need to get advice from their accountant before they agree to move the assets into a joint account.

Therefore, Rosa needs to have the capacity to understand the implications of moving the money into a joint account before she agrees or directs her advisor to do so. The advisor needs to ensure she understands all the implications and still wants to move the assets to be held jointly.

There is, however, one other big issue associated with moving the account to be held jointly before her death. That relates to Rosa's daughters, Maria and Maliana.

Rosa has a last will and testament that leaves all her assets to her three children to be divided equally at death. The lion's share of her assets are in her house and her securities account. Mikka also transfers ownership of the house so it is also held jointly between himself and Rosa. Therefore, when Rosa dies, there will be virtually nothing in the estate to be probated, as far as Mikka is concerned.

However, he will also expose himself to a fight with his sisters, who assert that it was not their mother's intention to leave him virtually all her assets. They refer to their mother's will, which clearly indicates her intentions that the assets be divided equally.

The court will likely order a return of the home and securities to the estate and divided equally, unless there's a clear intention supported in writing by Rosa that her true intentions were to leave all her assets to Mikka and not her daughters. Protracted and expensive litigation will ensue. Although the advisor might think that this is not his or her problem — and the children can fight it out — the advisor could be wrong. Consider the following:

1. What if Mikka absconds with the property, or otherwise disposes of it before Rosa passes away? The sisters are left with nothing. If their brother and the assets are gone, they may very well turn to dig into the advisor's and his or her dealer's "deep pockets." The sisters will assert that the advisor and dealer breached their duty to Rosa and they seek damages in the name of estate.

2. Even if Mikka doesn't abscond with the property, they may add the advisor and dealer to the lawsuit against Mikka, seeking judgment against all three jointly.

3. Even if the litigation is not against the advisor or the dealer, it is likely the advisor will be tied up in it as his or her testimony will be crucial to determine Rosa's intention — to gift the securities to her son or to hold them for "convenience" as Mikka indicated when he convinced his mother to move the account to be held jointly.

There may be good reason for clients to want to move their securities account to be held jointly. However, you should recommend they get legal advice, tax advice and you need to alert them to the implications of taking this step so that it doesn't come back to bite you and your dealer down the line.
 

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