If you've been doing some estate planning, you may have considered making the intended executor of your estate a joint account holder on one of your existing bank accounts. Or, if you've been appointed the executor of an estate, it might seem easier and more efficient to simply open a separate bank account in your own name to help with your duties in dealing with estate matters.
However, in both cases, using an estate account is the best way to go. Here's why.
What Is an Estate Account?
An estate account is a bank account in the estate's name. Its purpose is to act as a temporary bank account to hold the estate's money while an executor deals with the day-to-day matters associated with administering the estate, such as paying debts and, ultimately, distributing the estate's assets to the deceased's beneficiaries.
An executor needs to provide the bank with the required documentation to open an estate account, which usually includes proof of death. The executor must also apply for an employer identification number for the estate.
Reasons for Opening an Estate Account
While foregoing an estate account might appear to be more efficient, there are five good reasons why an executor should open one.
1. Easier access to the deceased's funds. When a taxpayer dies, their assets are often frozen. In order to access these frozen assets, the estate must be opened in probate and an executor appointed. Because an estate account is in the name of the estate, it is much easier to transfer these previously frozen assets to the estate account, where the executor can have ready access to the funds for the administration of the estate.
2. Deposit of payments made to the deceased. An executor is often in receipt of checks in the deceased's name, in payment of amounts owed to the deceased while they were alive. An estate account makes it easy for the executor to endorse and deposit these payments.
3. Easier record keeping for tax and other purposes. Having an estate account means having all of the deceased's money in one central place from which the estate debts can be paid and the final distribution of any remaining monies to the estate's beneficiaries made. In order to avoid potential personal liability, executors have to be extremely careful in their management of the deceased's estate. An estate account allows an executor to more easily keep track of incoming and outgoing funds and provide the types of records that may be required for tax or other purposes.
4. Avoidance of commingled funds. In order to avoid liability issues, an executor must take care not to commingle their own personal funds with those of the estate's. If an executor's personal funds are commingled with funds held in trust for the estate, the executor can be exposed to many potential liability issues. Because record keeping is much more challenging when dealing with commingled funds, an executor who faces an allegation that they have spent the estate's funds for their own personal use will have a much harder time proving they have not done so.
5. Protection of estate assets. If you're in the process of doing some estate planning, adding your intended executor as a joint account holder to one of your existing bank accounts may seem ideal. In a surviving joint account, when one of the account owners dies, the other holder becomes the surviving joint account holder. The assets in the account aren't frozen and the other holder continues to have access to the funds. However, from the perspective of your other beneficiaries, this can be a dangerous situation, as there is nothing to stop the surviving joint account holder from using the funds as their own. Also, any assets you hold in the joint account become vulnerable to claims from the creditors of the other joint account holder.
While opening an estate account might seem like a complicated, unnecessary step for an executor of an estate, it's actually the ideal vehicle for administration purposes and helps reduce an executor's liability exposure.
For this reason, an estate account is the better choice for executors, and grantors should keep this in mind when considering the use of joint accounts during the estate planning process.