Two or more persons can co-own a bank account. There are pros and cons to this arrangement — some of which most people are unaware. George Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates, notes that “as with so many other estate planning tools, joint bank accounts are sometimes used when better alternatives exist, while others fail to utilize them when appropriate”.
The information below will help you determine whether and when you should use this important estate planning tool.
A joint bank account allows two or more people to own and have full control over the account. Once money is deposited in a joint account, it belongs to all account owners equally, regardless of who deposited the money.
Each owner can write checks, obtain a debit card, and make purchases, deposits, and withdrawals without the other owner’s consent. When a co-owner dies, full ownership automatically vests in the surviving co-owner. If the account had more than two owners, then the surviving co-owners continue to equally co-own the account. The size of their share increases now that there is one less owner.
Reasons For Using Joint Accounts
Avoid probate. A widower who lives with his only-child son and owns no real estate or valuable tangible personal property, just cash, can add his son as co-owner of his bank account. When he dies, his estate passes directly to his son without the need for probate. Estate planners refer to this arrangement as a “poor man’s will”.
Convenience. Married couples and other persons who live together and share income and expenses typically use joint accounts, which help them to save, spend, and manage their money more efficiently.
Money Management. Joint accounts are often used to enable a family member to assist an elderly or incapacitated person with handling finances, such as paying bills, making deposits and managing investments.
Risks of Joint Accounts
Theft. A dishonest co-owner can withdraw or spend the entire fund without your knowledge or permission.
Creditors. The money in your jointly-owned bank account can be legally seized by creditors of your co-owner. Suppose you add your daughter to your checking account, and she later falls behind on credit card payments. The credit card company sues her to collect the debt.
In this scenario, the credit card company can obtain the money in the joint account to pay off your daughter’s debt. That is, your money can be used to service her credit card debt — and any other debt she might accrue, such as mortgage debt, student loan debt, auto loan debt, and medical debt.
Divorce. The money you have in a jointly owned account may be subject to a division of assets in a divorce proceeding. In other words, you could see your money end up in the hands of a former son- or daughter-in-law.
Conflict with your will: Joint account status typically overrides any instructions you leave in your will about whom you want inheriting your assets. Your will might state that you want to divide your assets equally among your children. But a jointly owned account belongs to the surviving owner, despite what your will says. As a result, division of those assets may not follow the will’s terms.
Taxes: In Pennsylvania, if you add someone other than your spouse to your bank account and that person, including a son or daughter, dies before you do, you will have to pay Inheritance tax on your own money!
Alternatives to Joint Accounts
Open a power of attorney (“POA”) bank account. You can enjoy the advantage of money management assistance same as with a joint account but without most of the risks discussed above by designating someone as power of attorney on your bank account. Just go to the bank and indicate this. A new “POA” account can be opened in a matter of minutes.
Designate payable on death (“POD”) beneficiaries. Same as with a POA account, in a matter of minutes you can specify beneficiaries who will receive the money in your account when you die. This eliminates many of the risks discussed above. BUT BEWARE. This might adversely impact your other estate planning. Never use “POD”, also referred to as transferable on death (“TOD”) without first discussing this with your attorney.
As you can see, there are more considerations involved in deciding whether and when to use joint accounts than you may have been aware of. Joint accounts are an important estate planning tool that should only be used as part of an integrated arrangement. The lawyers at Vasiliadis Pappas Associates can help you decide when and how to incorporate joint accounts as part of your estate plan. Call us!