Joint Accounts- Potential Pitfalls To The Convenience
Written by Teresa D. Lancaster
Today, many people name children, siblings, and others as joint tenants on their bank accounts. When asked, most will tell you it is for convenience. While that may be true, many do not realize the pitfalls to the convenience.
To begin, let’s make a critical distinction, because there are different ways you can put someone “on your account.”
One is to add someone as a “joint tenant”, a co-owner on an account. A second is to only give a person the authority to sign, but without any ownership, as a power of attorney over that specific account. A third is to name someone as a beneficiary, effective only at death, which is usually referred to as “P.O.D.” or “T.O.D.”
There’s certainly truth that joint accounts can be convenient. The joint tenant can write checks, withdraw money, pay bills and so on without any other authority to do so. Another benefit of a joint tenant is that they can access and use the account even after your death. So, in theory, they can pay your last expenses without having to wait for a person to be appointed by the court. Keep in mind, that is “in theory”, because the person is not obligated to use the account for those purposes.
That being said, there are downsides to joint accounts.
First, a joint tenant has full access to the account–there are no restrictions. The joint tenant can go to the bank, withdraw the money and head to Bermuda, even if you are still alive. Since the person was a joint owner the bank was not necessarily wrong in allowing the withdrawal. There may be legal action you can pursue against the joint tenant, but it would likely be an expensive and time consuming process.
Second, upon your death, the joint account goes only to the surviving co-owner. For instance, assume you have three daughters who are equal beneficiaries under your will. In order to help manage finances, you name your oldest daughter as joint tenant on an investment account which contains the bulk of your estate. Upon your death, the joint account goes directly to your oldest daughter, not your estate. Hence, the other two daughters have no legal rights at all in that account.
An alternative is to have someone acting for you under a financial power of attorney. An agent is obligated to work in your best interest and has no ownership rights. This can be accomplished with a General Power of Attorney intended to cover all assets and accounts. You can also fill out a power of attorney form with your bank or brokerage company for a specific account, effectively naming them only as a signer on the account, rather than a joint tenant. Though a signer can still write checks freely, and therefore has lifetime access and control, the person will not have any ownership rights. However, this type of arrangement also immediately ends at death, so it doesn’t help with paying expenses after death.
Another option is to set-up a revocable trust and name a person as current or successor Trustee. That person can access the account when they become Trustee, during your life, if you are incapacitated, and they can continue to act after your death. A Trustee has no ownership rights and has to follow the instructions for the beneficiaries under the trust agreement.
Finally, if the emphasis is to avoid probate for a simple estate plan, naming a “P.O.D.” or “T.O.D.” beneficiary on an account means it will pass directly to them at death, without probate. However, the beneficiary has no rights, control or access while you are still alive.
With this in mind, a joint account is not necessarily wrong, but you have to understand the risks and benefits. Generally, it can be most appropriate with a modest checking account, rather than a larger account representing most of your assets. It is always best to have clear legal direction in planning for how your money will be handled should you need assistance. While we all would like to believe a child or family member would “do the right thing” by using the money for your expenses only and then splitting the remaining amount with the other beneficiaries after your death, there are no guarantees.
Know the risks and plan wisely.