The Risks of Joint Bank Accounts for Seniors

We talk a lot in this space of the advantages of estate planning tools that allow you to transfer assets seamlessly to your loved ones outside of probate, and there are a variety of ways to accomplish that goal. One of those is to have a joint bank account that grants the joint owners rights of survivorship: in other words, when one joint owner dies, the other one automatically becomes the full owner of the account, without the need for probate or very much in the way of paperwork, for that matter. All that is usually needed is presentation of the death certificate to the bank.

Furthermore, if you were to become incapacitated during your lifetime, the joint owner of your bank account would have assets to the funds to pay for your care and other needs, without having to petition a court or get permission from anyone else.

It might surprise you to learn, then, that having a joint bank account with your adult child is generally not a recommended way to plan for the transfer of assets. A joint bank account that you've had for years with a spouse is a different matter. We're talking here about your own bank account that you may be thinking of adding another person to as a joint owner for convenience. It is convenient, but in our estimation, the risks of joint bank accounts in this situation are too high. Let's talk about why.

Perils of Joint Bank Accounts in Estate Planning

The first thing to understand about joint bank accounts is how ownership operates. No matter who initially opened the account, even if they put every penny into it, the moment someone else is listed as a joint account owner, they are entitled to full access to the account. So let's say that you put $100,000 into your bank account, and then added your adult son as a joint owner with rights of survivorship, with the idea that he could use the money to pay your bills and buy things you needed.

Your son could walk into the bank the very next day and withdraw every cent you'd deposited, and he'd be legally entitled to do so. Now, you may be saying to yourself, "He'd never do that!" And you might be right, but that doesn't mean there aren't other dangers lurking.

If you were to pass away, your son would immediately become the full owner of that bank account. That's fine if that's what you intend. But if you have other children, and your will specifies that your estate be divided equally between them, you must realize that the joint bank account is no longer in your estate. It's still possible that your son would do what you intended and divide the balance of the account equally with his siblings, but he's not legally required to. Imagine the conflict that would create in your family—surely not what you want.

Even if your son did share the money with his siblings, because it's now legally his, he will have to file a gift tax return with the IRS, since the gifts would exceed the annual exclusion amount of $14,000. Gift tax filings could come into play while you're still alive, too, if you put money into the account and your son took in excess of $14,000 out. While no gift taxes are owed because the amount does not exceed the $5.49 million lifetime exclusion, a gift tax return would have to be filed along with your personal income tax return.

Then there is the possibility of creditors accessing the account, either before or after your death. If your son had debts he didn't tell you about, and a creditor takes a judgment against him, they would likely be able to satisfy the judgment from any funds in the joint bank account. Likewise, the funds in the account could be in peril if your son were to go bankrupt or decided to use the funds for collateral on a loan, on which he then defaulted.

What's more, if your son were married and got divorced, there is a possibility that the funds in the joint bank account he has with you could be considered marital property, which means they could be subject to division in the divorce. It's possible he or you could contest an allegation that the funds were marital property, but that might involve significant legal fees. Fortunately, there are simple ways to avoid this, and other undesirable outcomes.

Better Alternatives to Joint Bank Accounts

Choosing an alternative to a joint bank account requires understanding what you hoped to accomplish with the account. If your primary concern is for someone else to have access to your funds to pay your bills and help you with financial transactions, a durable power of attorney is probably preferable.

With a durable POA, your chosen agent will be able to conduct financial transactions for you to the extent the written document granting them authority allows, and you can make the power as broad or as narrow as you wish. A power of attorney will not give your agent ownership of the funds, and they are still obligated to act in your best interests. However, you should still be careful to choose the most trustworthy agent possible.

The best option would be to create a living trust. A living trust will allow you to use and manage all of the assets in your trust just as you did when they were in your sole name. If you were to become incapacitated or pass away, a successor trustee would take over management of the trust assets and/or distribute them, per the terms of the trust document that you created with your attorney. Like a joint bank account, a living trust will keep the funds in the bank account out of probate, and will keep any other assets in the trust out of probate, too.

If avoiding probate is your primary concern, and you don't particularly need your intended beneficiary to have access to the account during your lifetime, a "transfer on death" account is another option. However, if the beneficiary becomes incapacitated or dies, probate is likely.

A good estate planning and probate attorney will help you evaluate your needs, and choose the best option to meet them.

You may also be interested in:

• Do You Need Probate if You Have Ownership in the Deceased's Bank Account?
• Titling Assets to Avoid Probate
• Who Needs an Irrevocable Trust?