Joint Accounts And Estate Tax Planning

What is a Joint Account?

A joint account is a financial account with two people listed as the account owners. The law views the funds in the account as belonging to both owners regardless of who deposited the funds into the account. In other words, the owners have an equal interest in the account and both owners can withdraw funds or transfer money out of the account without the consent of the other owner.

People use joint accounts for several reasons. Elderly parents often put their child’s name on an account for convenience so that their child can access the bank account in an emergency or if the parent becomes incapacitated. Some people have read that they can use joint accounts as a way to avoid probate. By placing their heir’s name on the account as a joint owner with right of survivorship, any funds in the account at the time of the person’s death automatically pass to the joint owner.

While this may seem like a very practical and reasonable plan, several problems can arise from using joint accounts as a primary means of estate planning for liquid assets.

Problems Using Joint Accounts to Avoid Probate

While joint accounts are a cheap and easy way to transfer money and avoid probating that asset, using joint accounts can be a risky form of estate planning.

Inadvertently Going Against the Terms of Your Will

If an elderly parent places a child on his or her account as a joint owner, any funds in that account will become the sole property of that child when his or her parent dies. However, if the parent intended for all of his or her assets to be divided equally among all of his or her children, this could be an issue. The joint account is not subject to probate regardless of what the will states. Therefore, if the child who is on the account as a joint owner decides he or she wants to keep all of the money in the account, his or her siblings cannot use the will to override that decision.

It is much better to add a child as an authorized signer on the account rather than a co-owner if the parent mainly wants to ensure that someone can access the funds in the account if the parent is unable to do so for some reason. An authorized signer is not an owner of the account. When the parent dies, the money in the account becomes part of the probate estate and it is distributed according to the terms of the will.

Potential for Fraud

Another problem with joint accounts is that the money in the account can be accessed by either owner at any time. For example, if you add your niece as a joint owner on your account because she pays your bills, she has access to all of the funds in your account. She can use those funds to pay your bills; however, she can also use those funds to pay her bills. While we never want to believe a family member or close friend would do something underhanded or fraudulent with our funds, it does happen.

Joint Owner’s Creditors

Your funds in a joint account could be at risk if the joint owner falls behind on his or her bills. The creditors of the joint owner may be able to seize the funds in your joint account to pay the joint owner’s debts because he or she has an ownership interest in the entire account balance regardless of who deposited the funds into the account. Furthermore, if the joint owner must file bankruptcy, the account will become part of the bankruptcy estate and be subject to being liquidated by the bankruptcy trustee.

The Joint Owner Dies Before You

If you are using a joint account for the purpose of avoiding probate, this system fails if the joint owner dies before you do. The joint account then reverts to you and it will become part of your probate estate. The heirs of the joint owner will not benefit from his or her name being on the account because all of the funds now belong to you. If your intent is to leave this money to the joint owner, or his or her heirs, it is better to do so through your will rather than through a joint account.

Medicaid Eligibility

Joint accounts can affect whether you are eligible for Medicaid benefits or other government assistance. Most government programs include the entire balance of a joint account as the applicant’s asset even though there are two names on the account. Furthermore, if you or the joint owner moves money out of the joint account, Medicaid may consider this a transfer of assets and penalize you.

You Have Better Options for Estate Planning

While joint accounts may be useful in very limited situations, they are generally not the best choice for estate planning. You have better options for distributing your assets after your death than opening joint accounts with each of your heirs. Consult with an estate planning attorney to discuss ways that you can provide for your loved ones using strategies that will not put your assets at risk or potentially complicate the probate process for your heirs.