Right of Survivorship

A common key feature of a joint bank account is the right of survivorship.  When one joint owner dies, the surviving owner automatically takes ownership of all funds in the account.  The funds pass to the surviving account owner outside of the estate, so the right of survivorship controls over any terms in the decedent’s will.  The clarity provided by the right of survivorship in joint bank accounts can be helpful to surviving spouses and family members responsible for administering an estate.

Ownership of Joint Accounts

Despite the clarity surrounding survivorship rights, a common misconception about ownership of joint account funds can lead people into trouble.  Ownership of a joint bank account is shared between two people.  However, even though they share ownership of the account, the account holders do not necessarily share ownership of the funds in the account.  In other words, the mere presence of funds in a joint account does not mean that the funds are owned jointly.  This distinction may seem like semantics, but it can significantly impact the use of the account funds.

Here, context is everything.  In determining the owner of funds in a joint account, North Carolina courts will observe who deposited funds into the account, the source of the funds, and the intent of the depositor, among other factors.

In many cases, funds deposited in a joint account are intended for shared ownership.  For example, if the account holders are married and the funds deposited are earned income to be used for ordinary household expenses, ownership may be shared evenly.

In other cases, funds remain the sole property of the depositor despite being held in a joint account.  Where a daughter is helping her elderly father manage his finances, they may open a joint bank account funded by the father’s assets.  In that scenario, the father would typically maintain ownership of the funds during his lifetime despite sharing ownership of the account with his daughter.

However, many cases are less clear and present a challenge for family members evaluating the transactions completed by the joint account holders.

Ripe for Abuse

Let’s imagine an aging man who finally asks for his dutiful eldest daughter for help in managing his affairs.  The father converts his checking and savings accounts to joint accounts with right of survivorship with his daughter to give her full access to his accounts and authority to make payments.  The father’s social security payments are deposited directly into the joint checking account, and she pays his monthly expenses with the joint accounts.  The daughter takes over managing his finances and scheduling, drives him to doctor appointments, does his grocery shopping, and cleans his house.

Over time, the daughter begins to add a few extra items for herself to the grocery list and fills up her gas tank with her father’s funds.  Then she begins writing checks to herself from the joint account – perhaps intended as “reimbursements” for her expenses or even her time.  The daughter considers her right of survivorship in the account and her father’s plan to pass the funds in his joint accounts to her.  She wrongly believe that her status as joint owner of the account gives her the right to spend the money however she wants.

One day, her siblings decide to meet and discuss her father’s diminished mental capacity and his finances.  The siblings are concerned about the numerous transactions in the joint account.  Did he approve the use of funds for her benefit?  Did he intend for those checks to the daughter to be gifts?  How much did he understand?  Did he even know about the transactions?  And what about the decision to liquidate an investment and move money into the joint accounts?  Did he really intend for those funds to pass directly to the daughter by right of survivorship upon his death?  The siblings are left in the unenviable position of evaluating their sister’s conduct without the benefit of their father’s input.

Hopefully, it is clear that a joint account intended for use by only one of the owners is ripe for abuse.

Liability for Misuse of Funds

When one account owner withdraws or spends joint account funds without the joint owner’s knowledge or consent, he may be liable to the owner for misusing those funds.  When evaluating the management of a joint account, one must consider who owns the funds, whether the owner approved of the use of funds, and whether the funds were used in the owner’s best interest.  These matters are particularly challenging when the owner’s mental capacity was diminished, and they often involve family dynamics and relationships are just as important to the parties as any monetary outcome.

At Miller Monroe Holton & Plyler, our attorneys have experience prosecuting and defending claims involving the misuse and conversion of funds in joint bank accounts, as well as similar claims involving abuse of powers of attorney and breaches of fiduciary duty by guardians, estate administrators, and trustees.  We appreciate every opportunity to aid individuals navigating such difficult circumstances and seeking to protect a family member.

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It doesn’t help that the North Carolina statute governing powers of attorney has historically been nebulous when it comes to the principal’s capacity or competency: Most notably, the law provided no definition of incapacity, leaving its determination up to an affidavit from the agent and, often, litigation.

A new law, effective as of January 1, 2018, purports to change this. When Governor Cooper signed Senate Bill 569 into law, North Carolina replaced its existing law with a version of the Uniform Power of Attorney Act, a set of standards adopted by more than 40 other states. The new Act provides a clear definition of incapacity and a streamlined standard for whether a power of attorney remains valid once an individual is incapacitated.

Back to the Basics

Recently, we published a guest post on the basics of the power of attorney: what it is, what it does, and why it is important. As a brief refresher, a power of attorney (POA) is a legal document that gives one person – the agent – authority to act on behalf of another – the principal. A general POA empowers the agent with authority to perform certain tasks on behalf of the principal, such as managing the principal’s finances.

The agent has authority to act on behalf of the principal so long as the principal has capacity to allow the agent to act. In situations where the principal becomes incapacitated or mentally incompetent, the agent loses her authority to act: That is, unless the document was a durable POA – which provides the agent authority to act on the principal’s behalf even if the principal should lose capacity.

The Old Law

The old law did not define incapacity. Further, it provided no clear set of criteria for determining how and when an individual would be adjudicated incompetent.

Under the old law, a POA was presumed not durable, unless the document specifically stated otherwise. Language like “This power of attorney shall not be affected by my subsequent incompetency or incapacity” would indicate the principal’s intent for the agent’s authority to persist beyond incompetency.

Under the old law, a durable POA was only valid if it was registered in the relevant county’s register of deeds office before the principal became incapacitated or incompetent.

The New Law

Enter the new Act, which streamlined these requirements. Incapacity is no longer a nebulous concept, but is defined as:

The inability of an individual to manage property or business affairs because the individual has any of the following statuses:

1. An impairment in the ability to receive and evaluate information or make or communicate decisions even with the use of technological assistance.
2. Is missing, detained, including incarcerated in a penal system, or outside the United States and unable to return.

Further, contrary to the old law, a power of attorney is now automatically deemed durable – and a principal who wishes his agent’s authority to terminate upon incapacity must write this into the document. In other words, POAs are now durable by default.

How this Affects You

The recording requirement

The new Act abandoned the recording requirement for POAs, and now a durable POA need not be filed with the register of deeds. However, the recording requirement still applies to POAs executed prior to January 1, 2018. The Act does not apply retroactively. As such, if your pre-2018 durable POA is unrecorded and the principal has since become incompetent, your document is not valid. Recording it now will not retroactively correct this.

Tip: Make sure you check the date on your document to see what law applies. This is an issue that arises in litigation, and although it seems like an insignificant detail, whether a recording requirement applied at the time you executed your document can determine whether an agent had authority to act on behalf of the principal. This can mean the difference between legal or illegal action, potential liability or lack of liability.

The definition of incapacity

The new definition of incapacity is unlikely to eliminate litigation entirely, but it does provide a clear set of criteria for determining whether a principal has legal capacity to authorize his agent to act on his behalf.

Documents executed prior to January 1, 2018

With inevitable exceptions, the Act generally does not invalidate POAs enacted before it went into effect. Most POAs will not need to be re-drafted, but please contact your attorney if you have questions about your document in particular.

The attorneys at Miller Monroe Holton & Plyler have significant experience navigating the legal issues arising from POAs, particularly in the context of capacity and competency. We are happy to work with you should you have questions about how the new law will affect your documents.

If you would like to read the full law, it can be found here.

This article does not establish an attorney-client relationship and must not be construed as legal advice.

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Business North Carolina magazine honors Tar Heel lawyers by publishing Business North Carolina’s Legal Elite, a listing of the State’s top lawyers in business-related categories.  Winners are chosen not by the magazine’s editors, but by the state’s lawyers.  In developing the list, Business North Carolina made ballots available to more than 20,000 Tar Heel Lawyers and only 3% were selected for Legal Elite.

Jason A. Miller has litigation experience in state and federal courts throughout North Carolina and beyond.  He has represented Fortune 500 companies in complex business litigation matters, builders and developers in real property disputes, information technology companies in trade secrets disputes, partners in closely-held company disputes, investors in business deals gone awry, and dozens of cases in between.  Jason has litigated matters in more than a dozen counties in North Carolina and is licensed to practice in every state and federal court in North Carolina.  Most recently, Jason became licensed to practice law in his home state of New York.

Jeffrey R. Monroe commenced his legal career in the Raleigh office of a mid-sized insurance defense firm, where he handled a variety of litigation matters throughout the state, including defending individuals and companies in personal injury claims, construction defect claims, and business disputes.   Since joining Miller & Monroe in 2013, Jeff has litigated business disputes, estate and fiduciary disputes, personal injury claims, and a variety of other civil litigation matters.

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With a small firm, you get the best of both worlds. For the cost of a junior associate at a large firm, you get a lawyer who will not only manage the client relationship, but who will also perform the legal work.  Despite what big firms would love to have you believe, it is rare that a litigation matter involves the degree of specialization offered by large firms.  If you have a relationship with a small firm that you trust, your lawyer will advise you when the specialization (and expense) of a large firm is needed.

At Miller & Monroe, we have been in your shoes. We have experience managing multimillion dollar budgets and dozens of staff.  We understand the budgetary pressures of the business world and knows that if a dispute is being litigated, it must be critical to the corporation and deserves our full attention.  You are not a number at Miller & Monroe. We view each corporate client as a partner and will treat your business as if it is our own.  We might not have the marble and mahogany, but Miller & Monroe has the knowledge and expertise to be your corporate litigator.

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