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How to Avoid Frozen Bank Accounts at Death? | Estate Planning 101

Attorney Thomas B. Burton answers the following question: "How to Avoid Frozen Bank Accounts at Death?"

In this video, we discuss an important aspect of estate planning: how to prevent your bank accounts from being frozen at the time of your death. We explain the common reasons why bank accounts get frozen, and offer practical tips and advice on how to avoid this problem. From setting up joint accounts and designating beneficiaries, to creating a will and establishing a trust, we cover the key steps you can take to protect your assets and ensure a smooth transition for your loved ones.

Want to know what type of estate planning documents are best for your situation? Download a free copy of my easy estate planning guide. Obtain Your Free Will vs. Trust Estate Planning Guide here.

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Hello and welcome back to Estate Planning 101!

I'm Attorney Thomas Burton, I'm an Estate Planning and Asset Protection Attorney here in Wisconsin and in today's topic, we're going to talk about how to avoid frozen bank accounts at death.

I'm going to use my trusty yellow legal pad once again and try to illustrate for you the methods you can use to avoid frozen bank accounts upon your death.

Now anyone, who's been through a probate action may know what I mean by frozen and I'm referring to the process whereby someone who dies with bank accounts in their individual name, as soon as the bank knows they have passed away, they will put a 'freeze', meaning stop all payments or withdrawals on the account until someone is appointed as personal representative of the estate or what's sometimes called in other states, the 'Executor'.

If you own bank accounts in your individual name and you don't have a beneficiary named and you don't hold them inside a trust, they will get frozen after your death by the bank, as soon as they know you passed away.

Forgive my artistry skills, I'm a lawyer not an artist but I'm going to use my illustrations here to try to show to you what happens and your options for avoiding it and we'll start here with my little sketch of the bank!

Here we have the bank and an individual, let's say it's John Smith. He has a checking account in his individual name, so the top of the account says, John Smith. Checking Account rewards checking whatever you will and that's what it reads on his checks!

Now this is the default, if he passes away, regardless of whether he has a will or no will, as soon as the bank knows he's passed away, they will freeze the account because the person in charge who opened it, the only person who had a contact with the bank was John Smith. After that, he's dead and the bank won't allow anyone access to the funds, unless someone has been appointed by the probate court as personal representative.

This is the default, I'm saying, if you hold a bank account in your individual name and you've done nothing else and this is where I will have clients tell me the bank accounts were frozen Now people worry about this because sometimes, they want their heirs or someone they trust to have access to the money to pay for their final expenses, the funeral and things like that. If you use this default method, they need to file all of the paperwork to open a probate court action, sufficient to get appointed by the court as personal representative, in order to act.

So that's what I have here on the second page, this is the process you have to use, again, if the account is in someone's individual name and they pass away, we've got the bank with the money, the person dies, the bank will freeze the accounts, they'll send a letter possibly if they know who is the personal representative and they'll give them a list of things to do.

Here we have this nice, stick-figure lady, she's, let's assume John did have a will and he named his daughter as personal representative. She will need to file all the probate court paperwork in the county, where he lived, when he passed away and this can range from six to ten to more forms, depending on the complexity of the estate and the heirs. You need to fill them all out, file, sign in front of notary and file them and if they're in order, the probate court will issue what we call 'Domiciliary Letters', appointing the personal representative as personal representative for the estate.

Now sometimes, people think, if I'm nominated in the will, I am the personal representative. You are not, unless the court appoints you.

For many estates in Wisconsin, if the heirs agree, you can use informal probate. However, if there's a disagreement, you're going to have to go to formal probate, hire a lawyer. You must hire a lawyer for formal probate. You can do informal probate on your own but most people end up hiring a lawyer because of the paperwork. It's complex and figuring it out takes time. I would plan three months for your PR to get this paperwork, the death certificate, meet with the lawyer and get it filed. Then maybe, within six months, three to six months, you could have the domiciliary letters back to the bank. Once they get appointed as personal representative and again, this depends on how big the estate is, how quickly you can get in an appointment to see the lawyer, how quickly the paperwork can get filled out but the whole process takes time. Then your lawyer or you, will help you file for an EIN number from the IRS for the estate. You need that EIN number plus the domiciliary letters, give that to the bank and your personal representative will open a new account in the name of the checking excuse me, in the name of the estate, John Smith estate checking account. That's what will become the account used to pay all the expenses and receive any receipts and ultimately, distribute assets at the end.

This process, it's a multi-step process just to get appointed PR, then take it to the bank, then open a new account. They never actually get access to these old accounts anymore, you start operating out of a new account which eventually will be gone and that's a reminder in the state, each year, then would be responsible for filing a tax return if it has enough income to generate the requirement which is currently $600 per year.

That's what I'm talking about when we talk about frozen bank account, how the process plays out with a lot of people who have an individual bank account in their own name, meaning no other owners on there and no one named as a beneficiary.

Now option two, which is something we do a lot at my office, is instead of using probate, we'll form a revocable trust, John Smith signs the John Smith trust during life. He names himself as initial trustee and his son Joe Smith as the successor. Then he goes to the bank and retitles them from John Smith individual to John Smith as trustee of Smith living trust, so his checks start reading Smith living trust.

In this example, let's say John Smith is 65 and he retitles them right away. I prefer retitling because it provides incapacity protection as you get older as well where Joe Smith, his son could help manage the accounts even if he's not dead but just temporarily incapacitated.

Now in this scenario, when John Smith dies, Joe Smith automatically becomes acting trustee. He doesn't have to go to probate court and file any paperwork because John Smith signed a trust during life, that names Joe Smith right in there, an and let's say, as a backup to Joe smith he named Susan Smith, his daughter the backup in case Joe passed away before him. The bank already has account three titled and they either have a copy of the trust or a copy of the certificate of trust which is a short form of the trust, showing that Joe Smith is the successor, if something happens to John Smith and John Smith can update this at any time if he ever did remove Joe Smith and make it, let's say, Susan Smith.

So, Joe is already named a successor, the bank knows that. All Joe has to do after john dies is either work with a lawyer, let them know, and obtain an EIN for the trust, the trust springs into existence, and the trust needs its own tax ID as of the date John passed away because generally, until that date, the trust is able to use John's social security number. You obtain the new EIN and you; this is something your trustee can do themselves or work with a lawyer on this part, it's not overly complicated. It's a one-page or online application with the IRS, get the EIN, give that to the bank and the account, and the trust account begins using that EIN after his death.

Now the Smith Living Trust is already in place and it dictates what happens next and ultimately the distribution to the heirs. So here, I just did an example of three different heirs or beneficiaries, however, many there are.

And Joe Smith can continue administering the trust according to the terms of the trust, generally, I tell people it's possible to close out a trust within six months to a year, depending on how quickly the trustee wants to work and if there's real estate, if you need to sell real estate, things like that, if there isn't real estate, it's all bank accounts, you can often administer the state pays the bills and distribute to heirs quite quickly.

But the key there, if you see here, is there's no probate court involved in the middle, this is a matter of private contract that John set up during life. Joe Smith steps into his shoes as trustee and takes over after his death.

So if you're using a trust, that's my preferred planning method because it can dictate how all these, it has flexibility, what happens if Joe Smith becomes incapacitated during his lifetime and he suddenly is on government assistance, well then, the trust can say let's hold that money for Joe, inside of the trust instead of distributing it outright to him or the same thing with his sister, what if she has special needs and is on need-based assistance and if she inherits $50,000 right now, she would be disqualified from that. Well instead, it can hold it in the trust fund for her and payout, let's say a monthly amount that will support and enhance her life, things like that.

Now option number three is, you can make accounts at a bank Payable on Death and I sometimes use this in conjunction with a trust plan or without. So in this case, the bank has the money, John smith is the account holder but he designates, in writing, the bank will have a form, a Payable on Death beneficiary form and they refer to it as POD - Payable on Death, he could either make the Smith Living Trust if he had this trust in place, the beneficiary upon death meaning after he's gone, the money automatically pays to the trustee of the trust or let's say, in this example, Joe Smith is his only heir, he could make it payable on death directly to Joe Smith.

The reason I say only heir is I don't love using Payable on Death beneficiaries where there are multiple errors or charitable beneficiaries because often the bank will only let you name so many but if you have one child, you could avoid probate on all your bank accounts by just making them Payable on Death to the child because also with one child, you don't have to worry about the children not getting along and disagreeing and having fights. That's why I like to have a trust document naming one person in charge to administer the estate and then distribute it according to your wishes.

The more children are heirs there are, I generally would like you to use a trust to have it flow through after you're gone, from the one method. We have it all flow through the trust and then distribute it to the heirs and beneficiaries but if you have just one child or one heir, this can work well.

Now you can't do the Payable on Death on a bank account, make it work as well for real estate. That's why I also like to use if you have real estate use a trust to have it flow through and personal property but if you're someone out there and you rent a place and all you have is cash in a bank account, let's say $300,000 and you have one child you want to be the heir, you could make that account Payable on Death and avoid the time, expense and delay of probate court by naming your child directly as the Payable on Death beneficiary of the account. I prefer using Payable on Death over making a child a joint owner of an account. You can check out my video on that, why to avoid making people joint owners but generally, if you make them a joint owner, they immediately have an interest in the account and God forbid, if something happened to them and they become subject to creditor claims or a lawsuit, potentially by making your child a joint owner on your account, you could inadvertently make your account subject to the claims of a creditor or plaintiff against a child or whoever else you added to the account.

So Payable on Death, in my opinion, is better in most instances because it only, the trigger is death, it would only kick in but this would be the third major way to avoid frozen bank accounts, upon your death is to make use of the Payable on Death feature and we have in Wisconsin statutes, requiring banks to offer that you make it Payable on Death. This is similar to a retirement account where you designate a beneficiary upon your death, which becomes a private contract between you and the financial institution, and as a reminder, your will does not override those Payable on Death beneficiary designations. If you choose to use the Payable on Death method, I recommend you keep everything updated and consistent because if you have multiple children, you want to make sure the money is going to the heirs, you desire. That's why if you have multiple children, I often prefer to have it Payable on Death to the trust, then the trustee pays all expenses of administration and distributes equal distributions to the heirs through the trust. That's if you desire an equal distribution among your kids or however you work it out but that puts one person in trust, who can manage the assets and make sure things are done according to your wishes.

I get this question quite often or not often but I'll see someone come in and they're surprised after a loved one passes away because the bank accounts were suddenly frozen by the bank sometimes this causes an issue for the heirs because they were thinking that they, let's say during life, was the power of attorney under finances and they had access to the mom or dad's account and they were planning, they thought the access would continue after death, so they could pay for the funeral. Well if all the money for the funeral is in the account, it's going to be frozen without using one of these other methods until probate is open and that can take some time and that's why, many of my clients favor using a trust to do a private administration of the estate after they're gone or at least, making one account payable on death to a beneficiary, so they have uh access to money to work with and again, if you use the payable on death method, I like to have that fund the trust, so the trust has some cash after you've gone to immediately begin paying bills and administering the estate.

Now the older you get, I often favor just retitling the accounts right away, right after you sign your trust, get them re-titled inside the trust, that's the cleanest and easiest method for your successor trustee who takes over after you.

You may have heard this term before, about freezing bank accounts, I know that's the vernacular I hear often when heirs and people come in. I thought I'd create this video for you talking about the methods to use to avoid, freezing a bank account, and why it happens in the first place when someone passes away in Wisconsin, without any other plan in place.

So, thanks for watching, and thanks for tuning in. If this video has been helpful to you, please consider giving it a LIKE, so that others can see and benefit from this information as well.

Thank you for tuning in and we'll see you next time.

© 2023 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.


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