Many of my senior clients want to be able to transfer their assets to their children in the simplest and quickest way possible when the time comes. Often, people think a joint account is an easy and inexpensive way to avoid probate by automatically passing property to the joint owner at death. Unfortunately, estate planning usually isn’t as simple as opening a joint account. While there are benefits, there are also many risks.
With a joint bank account, multiple people can be granted access to the money in the account. Primarily this type of bank account is used by married couples, civil partners, and housemates as the account holders can pay into the account, withdraw cash, pay bills, or write checks.
I often tell my clients that there are two scenarios in which a joint account typically works well (but not even these are risk-free). First, if you have one child and wish for everything to go to him or her, a joint account could provide a convenient succession path. Second, a joint checking account could make sense if you wish for your children to pay only your customary bills and to have access to a small portion of your funds in the event of death – since these working accounts don’t usually consist of the bulk of your estate.
Sounds pretty simple so far. So what are the risks?
Consider you create a joint account by adding your eldest child to the account. Don’t assume that he or she would consult with your other children every time before taking money from your account. There isn’t even a guarantee that your child will handle your money exactly in the way you would prefer. Too often, I have seen children (from even the closest of families) who are caring for their parents take money in payment without first making sure that their siblings are all on board. Even worse, they may use the money for their own purposes.
Another risk, particularly if you have multiple children, is that there may end up an inequitable distribution of your money upon your death. You might expect all your children to share equally, but there is no guarantee. Adding multiple children to a joint account might seem like a way to avoid this risk, but having several different children on different accounts is nearly impossible to manage and usually just multiplies the risk.
In addition, once a child is added on a joint bank account, the money becomes an asset for both parties. I know that sounds obvious, but I have to remind my clients that if the child comes across creditor or legal problems, the creditor could garnish the entire bank account. In other words, your account may be frozen or lose funds. You may be thinking that your child doesn’t have creditor problems, but what if he or she gets into a car accident or is on the receiving end of a lawsuit? These unpredictable instances only further the cons of joint bank accounts.
Moreover, I advise my clients to consider the extremes. What would happen if the child passed away before the parent? A grandchild could be left with only a fraction of what they were supposed to get and what was a non-probate asset would become a probate asset – divided up as per the Will.
Fortunately, there are simple ways to avoid these undesirable outcomes and still allow someone else to have access to your funds. Wills, revocable trusts and durable powers of attorney are great planning tools that minimize the risk. They specify that your estate will be distributed according to your wishes and provide for a simple asset management in the event of your incapacity.
If you or anyone you know is considering a joint account or is in the process of estate planning, please feel free to contact us for assistance.