Recently we reported on a Pennsylvania couple who may have lost their life savings by making a fundamental estate planning mistake. (See "Couple Makes Basic Planning Error and Loses Life Savings," April 27, 2004).

The couple put their daughter's name on their bank accounts. The bank later claimed the money in the accounts to pay off the debts of the daughter's soon-to-be ex-husband.

But a very similar case just decided by the Pennsylvania Supreme Court suggests that the couple may have a strong case against the bank. Here are the facts of the recent case:

In 1994, Ruth Libros opened a brokerage account with Morgan Stanley Dean Witter. The account was a joint account between Mrs. Libros, her son and her daughter. The account was created as an estate planning device and to allow Mrs. Libros's children to make withdrawals if she became incapacitated. Mrs. Libros made all contributions to the account. Later, the daughter was convicted of embezzling funds from the law firm where she was employed as a bookkeeper. After obtaining a civil judgment against the daughter for $300,000, the law firm sought to collect from the mother's Morgan Stanley account.

Two lower courts concluded that thanks to a Pennsylvania law called the Multiple-Party Accounts Act (MPAA), the joint account belonged entirely to Mrs. Libros because she was the sole contributor. The MPAA provides that when a joint account is created with a financial institution, the account belongs to the parties in proportion to the contributions made by each to the account. Since the daughter had contributed nothing to the account, none of the money was hers and the law firm couldn't get at it. The law firm appealed, arguing that a brokerage account does not fall within the MPAA's definition of "account" and that Morgan Stanley is not a "financial institution" as defined in the statute.

The Supreme Court of Pennsylvania agreed with the lower courts and ruled against the law firm. The court held that the MPAA covers brokerage accounts at investment houses like Morgan Stanley. Therefore, Mrs. Libros's daughter had no ownership interest when the law firm sought to satisfy its $300,000 judgment. At most, all she has is the expectation that the money would be hers (and her brother's) upon her mother's death.

Many other states have statutes similar to Pennsylvania's MPAA. But don't rely on them to protect you from the dangers of joint accounts. Joint accounts, sometimes called "the poor man's will," are generally a bad idea for several reasons. Instead, consult with an elder law attorney about meeting your overall estate planning goals without jeopardizing your savings.

To download the full text of the court's decision in Deutsch v. Johnson (Pa. No. J-126-2003, April 29, 2004), in PDF format, go to: http://www.courts.state.pa.us/OpPosting/Supreme/out/J-126-2003oaj.pdf.
(If you do not have the free PDF reader installed on your computer, download it here.)