Joint Bank Accounts – Benefits/Risks

Joint bank accounts can be helpful in several ways, but such accounts can also be a trap for the unwary. A couple of the major benefits are as follows:

  1. Trusted joint account owner can pay your bills. Probably the most common reason for opening such accounts, your joint account owner (typically a spouse or a child or other trusted individual) can pay the bills or make deposits on behalf of other owner. Sometimes financial powers of attorney are not accepted by financial institutions, but a joint account owner can do anything with the account (assuming no restrictions such a requiring two signatures).
  2. Probate avoidance. Unlike individual accounts, joint accounts can avoid the legal process of going to court to determine if a Will is valid or determining the heirs if there is no Will and determining who has the ability to pay bills.

However, there are numerous reasons or risks that should be considered before you open a joint bank account including, without limitation, the following:

  1. Creditors of joint account owner. If your joint bank account owner gets sued or has other creditor issues, your account could be at risk. There are ways to protect your beneficiary from their creditors after you die with proper planning. 
  2. Joint owner gives authority to someone else. The joint account owner could have a financial power of attorney that gives authority to handle all of the joint account holder’s accounts. For example, you make your child as a joint account owner and the child has marital issues. Does it bother you that the son-in-law or daughter-in-law could have access to your account since they could be named as agent under the power of attorney of your child?
  3. The joint account owner becomes untrustworthy. One of the most common forms of elder abuse is financial abuse from family members. For example, a parent with diminished capacity trusts a child who uses the account for the child’s own personal gain. Furthermore, often a parent trusts the “in town” child to take care of all of the other children equally with the funds in the joint account after the parent dies. That obligation is strictly moral and not legal.
  4. The joint account owner changes your disposition pattern or has unexpected obligations. Even if you trust your spouse (if spouse is a joint account owner) that the joint account funds would be disbursed the way you want, it is possible that your surviving spouse could remarry and could be obligated to pay the bills of the new spouse. For example, your surviving spouse remarries and the new spouse has health issues such as long-term costs. Since a spouse has a duty to support their spouse under state law, the joint account funds could be used to pay the new spouse’s nursing home care costs. Of course, if your spouse remarries, they can do anything they want with the funds that they own – including giving the assets to their new spouse (instead of your children or other beneficiaries that you desired).
  5. Public benefits issues. Since public benefits such as Medicaid are “means-tested” (the government looks at your assets prior to giving you benefits), joint bank accounts could be problematic for achieving eligibility. For example, if the joint account holder also contributed to the account, they will have to prove all of their contributions and what was “theirs” as Medicaid will assume the entire account was that of the Medicaid applicant and could only be used for the applicant or else there could be a penalty resulting in Medicaid ineligibility.
  6. Financial aid issues. If you name your child a joint owner and their child’s (your grandchild’s) college financial assistance is dependent or based on your child’s lack of assets or income, your grandchild might lose eligibility for financial aid.
  7. Probate avoidance not achieved due to unexpected events. As indicated above, one of the main reasons that joint accounts are used is to avoid probate. However, if the joint account owner (i.e., your child) dies first, then the account becomes an individual account and is subject to probate. Furthermore, sometimes you may think you have a joint account, but it is set up in a way that probate is required (i.e., tenants in common accounts).
  8. Joint owner is disabled at the time of your death. What if your joint account owner is mentally disabled at the time of your death and doesn’t have capacity to handle funds? Will guardianship be needed? Will their public benefits be jeopardized? 
  9. What if someone is needed to collect payments due and settle claims and you pass without a Will or Trust? A joint account gives no authority to the other joint account owner to collect on assets due to the deceased owner or settle claims of the surviving joint account. So, sometimes it is best to have a Will and probate so an executor can act. A Trust would give the trustee authority to act on behalf of the Trust whether the trustor is either dead or disabled. Trusts avoid probate. Powers of attorney terminate at the death of the principal.

Although setting up a joint account is often useful, if any of the reasons above (and there are more not mentioned) are a concern, then alternative planning should be considered to insure that you protect yourself and those you want to protect even after you pass.