Joint ownership of financial accounts, including savings and checking accounts, offers many potential advantages, and also a number of risks. Depending on your circumstances and goals, you may want to reconsider joint account ownership. Here are some pros and cons of joint account ownership to consider.
What is a Joint Account?
A joint account is a bank account or brokerage account to which two or more people have access, including the ability to deposit and withdraw funds, make payments, and receive information. Married couples often have joint accounts, but joint bank accounts are also common for business partners, as well as older adults who grant access to their bank accounts to adult children for convenience or estate planning purposes.
While people are most familiar with joint checking accounts, credit card accounts, loans, and lines of credit (LOC) can also fall under the heading of joint accounts. There are different types of joint accounts. Some require both joint owners to sign-off on transactions and others only require one joint owner to handle transactions. This article will focus on joint ownership where both owners have full access independently to accounts.
Advantages of Joint Account Ownership
Joint accounts, particularly bank accounts, are common precisely because they do offer a number of benefits. Those advantages include:
Convenience and Ease of Access
It’s hard to beat a joint bank account for convenience. For example, when spouses have a joint checking account, they can have their paychecks directly deposited and manage household expenses from a single financial “pot” without needing to get approval from the other or transfer money back and forth between separate accounts.
Similarly, an older person who makes an adult child a joint owner on their bank account can have the peace of mind of knowing that their child can oversee their finances and pay their bills without their involvement or input.
Transparency
Having finances all in one place makes it easier for all account owners to see what financial transactions are taking place. All owners on the account can see what goes in, what comes out, and when. Because all owners have full access to account information, if everyone chooses to review that information, it can foster clear communication and allow all parties on the account to be fully involved in managing finances for the family (or business).
Emergency Access
For many older people, having an adult child, friend, or other relative as a joint owner on an account provides peace of mind in the event that they suffer an illness or injury that renders them unable to manage their own finances. With a joint owner on the account, that second person can make sure that important expenses like mortgage or rent, utilities, and medical bills are paid in a timely fashion. There is no need for measures like seeking guardianship or conservatorship to gain access to the account.
Right of Survivorship
Many (but not all) joint bank accounts have a right of survivorship. When one account owner dies, ownership of the account remains with the surviving owner. Assets in the account do not have to go through probate.
This can be a plus for individuals who would otherwise have few probatable assets and want to keep their estates out of probate. It also ensures that their intended beneficiary would likely have access to account assets much sooner than if those assets had to go through probate. However, there may be a temporary hold on the account after one joint owner’s death, limiting the other owner’s access for a brief period.
In short, joint account ownership offers a lot of benefits. But there are also downsides that you should be aware of, especially if you are considering joint bank account ownership for incapacity planning or estate planning purposes.
Disadvantages of Joint Account Ownership
Some of the same features that provide the benefits above are a double-edged sword, creating the biggest risks of joint account ownership, including:
Loss of Control of Account Assets
The fact that multiple owners can deposit funds into, and withdraw funds from, a joint account means that potentially, one owner could remove funds without the other owner’s assent. Obviously that could be disastrous if an adult child with debt or other financial issues were to help themselves funds from the joint account.
Vulnerability to Creditors
Even if you are certain that your intended joint owner would never remove funds from your account without your authorization, those funds could nevertheless be vulnerable to their creditors—including a spouse from whom they are divorcing. Because a joint owner has full access to the account, any judgment creditors they have will also be able to reach account assets—even if the other joint owner contributed all the funds in the account.
Limited Personal Privacy
A joint account may not be the best option for individuals who want to keep their personal finances private. The same transparency that provides accountability between spouses or business partners could also give a joint owner unfettered access to the original account owner’s spending or income information.
Estate Planning Complications
Joint account ownership may keep funds out of probate, but it can also lead to unintended consequences when it comes time to distribute an estate. If a parent’s will leaves their assets to their three children in equal shares, but one child is a joint owner on the parent’s bank account, account funds will pass to them alone outside of probate. They will then also receive one-third of the parent’s probate estate, leading to an unequal distribution that the parent probably did not intend.
Alternatives to Joint Accounts for Incapacity Planning and Estate Planning
If your primary purpose in creating a joint account is to give a loved one access in the event you need help with your finances, or to simplify estate planning, there are safer alternatives.
Creating a durable financial power of attorney would enable a loved one to seamlessly take over management of your financial affairs without exposing your assets to risk. You could also create a living trust that allows you to control financial accounts you place in the trust while you are able; if you become incapacitated or die, the successor trustee you have named will take over as dictated by the trust document.
Placing assets in a living trust also prevents unintended unequal distribution of your estate. If an account is held in a trust rather than by joint owners, account assets will be distributed in accordance with the trust document.
Using beneficiary designations on assets, like payable on death or transfer on death, will allow an account owner to avoid probate court when they pass away. You can talk to your financial institution about this option to see if they allow you to use a beneficiary designation.
Work with an Experienced Estate Planning Attorney
To learn more about the pros and cons of joint account ownership, or to explore alternatives to joint accounts for incapacity planning and estate planning, speak with an experienced attorney. The knowledgeable estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras work with clients who need to plan for their financial futures. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.