Joint Pains

A lot of my work as an estate planning attorney is talking with clients to get a thorough understanding of their assets, family, and planning goals so I can help them carry out those goals. Something I hear frequently, which fills me with dread every time, is some variation of, “Oh yes, I put my son on my bank account.”

Having a joint bank account with an adult child is deceptively attractive. It’s a simple process to add a joint owner, and it means that the joint owner can access those funds to pay bills, and that when you die the account goes to that joint owner instantly, without any extended legal process or court-supervised probate. Best of all, it’s free!

So – what’s the catch? In practice, the downsides of using joint accounts as an estate planning tool are numerous. The two biggest problems I see are assets unintentionally going to the wrong people, and liability of the account should trouble come for the joint owner.

1. Unintentional Disposition of Assets

When you make someone a joint owner of your account, one of the consequences is that when you pass away, the account becomes theirs alone, instantly. This means that the account will not be distributed according to your will or trust, which can be a significant problem if you have multiple beneficiaries.

Furthermore, what happens when your joint owner passes before you? Where does the account go? In most cases, it will have to go through a court-supervised probate process, which in Virginia can take years if you’re unlucky, with the associated taxes and fees.

Even if you make an account joint with all your children, if one of them passes before you, you’ve accidentally disinherited that set of grandchildren – joint ownership will not automatically update in the event of a death, which is something you can do in a trust.

2. Liability of Joint Owner

By making someone a joint owner, you have in essence made a gift to them of the entire value of that account. That means that if there is a wolf at the door for your joint owner, that wolf is going to be able to come after your joint account.

If your joint owner gets in legal trouble, is sued, or goes bankrupt, among many other potential hazards, there is a very real possibility that the creditor will be able to garnish that joint bank account – even though you yourself had absolutely nothing to do with the problem! There may be defenses you can raise, but it’s a bitter pill to have to spend thousands of dollars defending yourself in court against something that you didn’t do.

There are times when joint ownership is the correct choice, but they are few and far between. What should you do instead?

First, you should execute a Power of Attorney. That’s a brief, straightforward legal document that gives another person the authority to take legal and financial actions in your name, including accessing your accounts if necessary. However, the person acting under your Power of Attorney is not treated as an owner, and neither of the threats above apply.

Second, you should find a better way to get the account to your beneficiaries on your death. There are many ways to do that. One of the best is to use a Revocable Living Trust, essentially a more modern form of a will, which can both transfer assets easily on death and also contain robust disability planning. You may also use a beneficiary designation on certain accounts, although that loses some of the other benefits of a trust.

What specific tool is ideal will depend on the specifics of your situation. If you have beneficiaries with special needs issues, for example, the right tool for the job will certainly be some kind of trust, not a beneficiary designation.

You can avoid a lot of grief by planning ahead. Take time to talk with a professional and understand your options so you can make an educated, informed choice.