Joint bank accounts can be a useful estate planning tool for passing money to loved ones outside of probate and planning for disability. However, while they can achieve these goals and are useful in certain circumstances, joint accounts also present risks.
A joint bank account allows two people to own and fully control the account. Once the money is deposited in a joint account, it belongs to both account owners equally, regardless of who deposited it. Each owner can write checks, obtain a debit card, and make purchases, deposits, and withdrawals without the other owner’s consent.
A parent, for example, can add a child to an account to give the child access to money if the parent becomes disabled. The child can then pay bills and manage money for the parent. And when the parent dies, the entire account passes to the child without having to involve the court.
Risks of Joint Accounts
The most obvious red flag of a joint account is that you must be sure to trust the other owner since they will have full access to it. However, joint accounts also have some less-obvious risks, including the following:
A potential issue with joint accounts is that they make the account vulnerable to all creditors from each owner. Creditor issues affecting one owner, therefore, affect the other 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.
With the average American owing between $10K and $30K in non-mortgage debt, this is a real possibility. Young people tend to owe more debt and have higher delinquency rates than older borrowers.
We also see this played out in cases where a parent needs to apply for Medicaid benefits, but their child or someone else has added their parent, the Medicaid applicant, to their bank account. The funds in any joint account are also counted towards resources for the Medicaid applicant. It’s important to separate all assets belonging to the Medicaid applicant. The Medicaid applicant can name a beneficiary of the account or even have a joint account with someone else but not have funds in that account, which would disqualify them from Medicaid benefits.
Alternatives to Joint Accounts for Estate Planning
A power of attorney will ensure family members have access to your finances in the event of your disability. A trust may make more sense if you are seeking to transfer assets and avoid probate.
Not all joint accounts are the same, either. Structuring an account as a “Transfer on Death” account rather than a “Joint with Rights of Survivorship” account will give a beneficiary access only after you pass away, thus skipping probate while avoiding potential gift tax issues.
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