by Timothy A. Hoy
Many people set up joint bank accounts with a friend or child for “convenience,” so that the other person on the account can easily write checks, pay bills, and otherwise assist with daily financial chores. Other times, joint bank accounts are used as a rudimentary form of estate planning – to provide for the automatic ownership of the funds by the surviving owner. However, there are several risks involved when adding another person to a bank account for “convenience” or “just in case” purposes. Before creating a joint bank account, one should be aware of some of the potential consequences of that decision.
The real benefit to establishing a joint bank account is that it is a simple and easy way to make sure that someone else will be able to access your funds. There is little paperwork to set up the joint account, and it is very easy for everyone to get money out. While sometimes this situation will work out perfectly fine for the original account holder, often there are several problems that will arise.
The Other Joint Account Holder Will Have Unrestricted Access to the Funds
Typically, either party to a joint bank account has the right to make unlimited withdrawals, regardless of who deposited the money. Each joint owner will be able to withdraw money from the account freely, without the other owner’s permission.
Some people unfortunately take advantage of the easy access to money in a joint account. In some cases, joint owners who were supposed to be managing an older relative’s money have improperly used the money for their own benefit. With a joint bank account, the once trustworthy niece faced with financial difficulties can now invade her aunt’s savings without knowledge or consent. While it is possible to take legal action under these circumstances, it is often very difficult, expensive, and time-consuming to attempt to get the money back.
The Money Could Get Caught in the Middle of the Other Joint Owner’s Legal Problems
A joint bank account may be vulnerable to legal attacks by creditors of either joint owner. For instance, if a joint bank account owner goes through a divorce, his spouse could claim a right to some of the funds in the account. Even if the joint owner who deposited all of the money could prove that he contributed all of the funds to the account, he might have to go to court to stop the other owner’s spouse from getting the money. Another possible scenario is that an adult child, whom has been added by his parent to a joint account, is sued by a creditor, or gets involved in a serious automobile accident and is sued for more than the policy limits of his insurance. If a judgment is entered, the judgment creditor has the right to ask the child, under oath, about all of his assets and the location of any bank accounts in which he has an interest. The parent may not have notice of the looming disaster until the joint account is garnished. At that time, the account could be frozen, and the money could be turned over to the creditor, unless the parent were to appear in court and succeed in having the garnishment set aside. In the meantime, outstanding checks may bounce, credit may be affected and legal fees will be incurred – without a clear path to a successful outcome.
There are other pitfalls that are associated with joint bank accounts. For example, the estate may have to pay an inheritance tax on the funds in the account to which someone else’s name was added, even though it was assumed the account would automatically pass to the joint account owner outside the estate probate process. Pennsylvania imposes an inheritance tax on jointly held property upon a joint tenant’s death. For example, if a parent contributes 100% of the funds in an account held jointly with a child and survives the child, one-half of the proceeds held in the account will be deemed taxable to the deceased child. This result can seem unjust and may be an unintended consequence of hasty planning. Another consideration that is not as common, but should be considered, is the impact on Medicaid. Transferring property into joint ownership with other people can be considered divestment under the Medicaid regulations. The penalties for divestment include, among other potential items, disqualification from receiving benefits and a disqualified person may have to sell property which is otherwise exempt to pay nursing home expenses.
Jointly held property ownership can be a very effective and inexpensive way to transfer property at death, if everything goes according to plan. However, unforeseen developments can make this a very expensive substitute for a proper estate plan. If one is thinking about adding someone to a bank account for convenience or estate planning purposes, the risks and benefits should be weighed carefully. There are better and safer ways to make sure that one’s heirs receive deposited funds after death. Alternatives, such as pay-on-death accounts, durable powers of attorney and the benefits of implementing a comprehensive estate plan, should be discussed with an attorney.