Smart Move or Risky business?
Joint bank accounts are an extremely popular estate planning tool. They are readily available and don’t require any complicated paperwork. Most commonly, parents open joint accounts with their children, enjoying the apparent peace of mind knowing that their children can access their funds when necessary. Nevertheless, as beneficial as joint accounts can be, this perceived peace of mind is deceiving. Joint accounts bear substantial risks that careful estate planners should be aware of.
Joint Account Benefits
Before delving into the dangers of joint accounts, let’s examine some of their legal benefits that make them so appealing to people. The principal advantage of a joint checking account is the right of survivorship. Depending on your jurisdiction, the right of survivorship might be automatic. However, in New York, it must be indicated on the account’s signature cards.
Assuming you opted for a right of survivorship, if one account holder dies, the other account holders simply take over the account. The deposited balance remains continuously available without any further complicated steps. Notably, joint accounts with the right of survivorship bypass probate and do not become part of the decedent’s probate estate. (However, they do become part of the decedent’s estate for tax purposes.) As a result, persons included in such joint accounts can immediately pay bills without completing complicated paperwork, hiring an attorney, or waiting for the probate court to release the estate. Furthermore, they can access these accounts during your lifetime should you become unable to do so for any reason.
Joint Account Risks
Does avoiding paperwork, attorneys, and courts sound good to you? We are sure it does, but it should not distract you from the major risks these accounts bear.
In a joint account, all account holders can access 100% of the bank balance, regardless of who deposited the funds. Any account holder has the right to withdraw everything and even close the account, leaving you potentially penniless. We are sure that you would only include persons you absolutely trust as joint account holders who would not take your money. Unfortunately, it may be out of their control.
Joint ownership also means that the joint account holders’ creditors can access the account. For example, New York assumes all account holders own equal shares of funds deposited in a joint account, regardless of their contributions. A quick lawsuit against, say, one of your children, is all it could take to wipe out half of your savings. Or, if one of your children were to file for bankruptcy, the funds in the joint account could be seized by the bankruptcy trustee to pay off creditors.
Besides creditors, even your in-laws might take a bite out of your wealth. Perhaps you opened a joint account with a married child. If that child were to divorce, the court would consider half or even the entirety of the deposited balance as part of the marital estate, subject to equitable distribution. The court would likely ignore the fact that you deposited all the money, that it’s your life savings, and that you made your child an account holder only for convenience.
Finally, although we do not provide tax advice, keep in mind that joint accounts with someone other than your spouse can trigger unexpected gift and estate tax liabilities, which vary greatly between jurisdictions.
Alternate Solutions
Are you still considering a joint account, or would you rather avoid these risks? If so, you should consider alternatives that allow you to avoid probate safely.
Payment on Death Accounts
If you have an investment or retirement account, you generally designate a beneficiary who would assume ownership of the account in case of your death. But did you know you can also usually designate a beneficiary for a checking or savings account? To do so, you convert a conventional bank account into a payable-on-death (POD) account. In New York, these accounts are also known as Totten trusts, based on a seminal New York court case that legalized them.
Trusts, like a POD account, tend to sound intimidating. However, a Totten trust is not much different from a regular checking or savings account. During your lifetime, the account acts the same as any other account. You can freely deposit and withdraw funds, even change beneficiaries. It is only upon your death that the special trust mechanism springs into action.
Upon your death, the designated beneficiary merely needs to provide a death certificate to the bank. Then, the bank pays out the balance to the beneficiary. Similar to a joint account, the funds do not pass through probate and do not become part of your probate estate. This allows expedited access to your funds without the need for courts or attorneys. However, unlike a joint account, a beneficiary has no rights to the deposited funds during your lifetime. This keeps your account safe from their creditors and spouses.
Durable Power of Attorney
But what if you want your beneficiary to access your account during your lifetime in case of an emergency? Here, a durable power of attorney can help.
A durable power of attorney gives someone you trust access to your funds in an emergency. The designated person can then use the funds for your benefit without assuming ownership. This allows him or her to take care of ongoing bills, pay your rent or mortgage, and make other financial decisions on your behalf. A durable power of attorney is a simple form that you can obtain HERE and complete yourself or with our help.
A Word of Caution
While a durable power of attorney is a helpful tool to plan for the unexpected, it is not immune to abuse. Read our article, “When the Housekeeper Becomes the House Keeper“, to stay clear of fraudsters and imposters.
Image credit: Tirachard Kumtanom