Joint Accounts: Pros, Cons, And Alternatives

Posted on May 9, 2014 at 8:25 AM

Many people add a child as a co-owner on bank and brokerage accounts. It is a convenient way of managing accounts, paying bills, and passing accounts to the co-owner on death outside of an estate. However, there are risks and drawbacks to joint ownership. First, a joint owner has the right to write checks and to make withdrawals. In most cases this will not be a major problem, since the person who added the co-owner probably trusts the co-owner not to make unauthorized withdrawals. But trust is sometimes betrayed, either because of dire economic circumstances or through conscious disregard for the property of the original owner.

Second, even when the trustworthiness of the co-owner is beyond question, property in a joint account is vulnerable to claims against the co-owner that might arise because of a car accident, a divorce, or a personal or business debt. Finally, if the account is set up with the co-owner as a joint tenant with right of survivorship, upon the death of the original owner, the jointly-owned account legally becomes the sole property of the co-owner. In many cases that is the intended result, but in some cases the original owner intended and anticipated that the co-owner would divide the joint account with other intended, but unnamed, beneficiaries---such as the original owner's other children. However, the surviving co-owner legally owns the account and might refuse or “forget” to divide the account as the original owner intended. And even if the co-owner has every intention of dividing the account as the original owner intended, if the surviving co-owner should die, become incapacitated, or be sued by an injured party or a creditor shortly after the original owner passes away, the assets in the joint account might ultimately be distributed as part of the survivor’s estate, or be tied up by and paid to creditors of the surviving co-owner.

Despite the risks, a joint account may be appropriate in many situations. But there are alternatives to joint accounts that provide many of the benefits of joint accounts, while eliminating or minimizing certain risks of joint accounts. Such alternatives include the creation of a living trust, a power of attorney, or the use of “authorized signatories” on checking accounts (check writing privileges, without ownership), and “transfer on death” (TOD) or “pay on death” (POD) designations. Before adding a child as a co-owner to an account or other asset, it is important to consider the risks of a joint account and other options that might better accomplish your lifetime and testamentary objectives.

Categories: Estate Planning, Probate And Avoiding Probate, Joint Property And Transfer On Death Property