Joint Accounts and Estate Planning: What Can Go Wrong

Many of us like to think that we are being practical in an effort to be more efficient. This can be especially true when it comes to money later in life. We want a solution that feels simple, efficient, and doesn’t result in added stress. That’s one reason why many people turn to joint accounts, but often without realizing the legal implications.

All you need to do is add a name to your account to avoid probate and make bill-paying easier. Honestly… what could go wrong?

Don’t get me wrong, joint accounts have a purpose, but they are often a misunderstood financial tool. And if they are used to substitute for proper financial planning, joint accounts can result in confusion, family conflict, and ultimately, unintended transfers of wealth.

An Example of Good Intentions with Bad Results

Janet is a widow in her late 70s. She is able to live independently and manages her own finances, but she finds it more complicated these days. Her only daughter, Katie, lives more than a thousand miles away and, although they speak weekly, Katie can’t help with the day-to-day tasks.

Wanting a backup plan, Janet adds her younger sister to her bank account. Her sister lives in the same city and Janet thinks this will provide a backup if an emergency comes up so that the bills continue to be paid. Janet does not view adding her sister to the account as “giving away” money and still thinks of the money as hers and expects it will go to her daughter one day.

Unfortunately, and without a will, Janet passes away unexpectedly. Janet’s daughter, Katie, is surprised to learn the account now belongs to her aunt.

Since the account is joint tenancy with right of survivorship (JTWROS), the remaining balance automatically goes to the survivor, the aunt. Katie has no legal claim to the account even though this was not her mother’s intention.

There is no probate.

There is only an outcome that no one planned for nor intended.

Why Joint Accounts Are Misunderstood in Estate Planning

Adding a person to your account can be easy to do and can provide convenience. But in reality, there is a change in legal ownership.

Some incorrect assumptions include:

• “It’s still my money.”
• “It will allow them to help me pay bills if I can’t.”
• “My family members know my true intentions.”
• “My will will make everything right.”

But the reality is, the “with right of survivorship” phrase in “joint tenants with right of survivorship” typically overrides your estate plan (in most states), including your will. This means that when one of the account owners dies, the surviving owner(s) typically receive the funds automatically (outside of probate), regardless of what the estate document says.

The Unseen Risks of Joint Accounts

1. Control Can Be Lost During Your Life

Typically, each joint owner has full access to the account. This means anyone listed on the joint account can withdraw money, move funds to a different account, and even close the account. From the bank’s perspective, it does not matter if only one of the account owners funded the account initially.

When joint accounts are set up with friends or extended family, people don’t expect a problem. But life happens, and behavior can change in ways you never predicted.

2. You Can Expose Your Money to Someone Else’s Problems

Adding a person to your account can result in exposing your money to additional risks, such as:

• Creditors
• Lawsuits
• Bankruptcy
• Divorce
• Tax liens

Joint ownership blurs the lines even if you intended the money to stay yours.

3. It Can Create Inheritance Confusion and Problems

After someone dies, a joint account can create surprises during a time when emotions are already high.

The children who are not on the parent’s joint account may assume the money will still be divided equally. Step-siblings’ expectations may be different depending on the order of death. The “simple solution” of using a joint account can result in resentment, accusations, and even long-term family splits.

4. Joint Accounts Don’t Mitigate Cognitive Decline Issues

As we get older, there is concern about memory loss or declining health. But joint accounts don’t always mitigate this problem.

If an owner of a joint account becomes cognitively impaired, financial institutions may flag and freeze accounts or require legal documents (especially if capacity is questioned). As a result, joint ownership does not provide the same legal safeguards as a properly drafted financial power of attorney or revocable living trust.

5. Unforeseen Tax Consequences Can Result

Adding heirs as joint owners can sometimes affect their taxes. In some instances, it can either reduce or eliminate the step-up in cost basis that the beneficiary would typically receive. This can result in increased capital gains taxes when the beneficiary sells the assets in the future.

So Why Are Joint Accounts Used Then?

There are benefits to joint accounts:

• Access to funds can be quick and immediate
• Often no probate
• Simplicity, at least at first

But it isn’t always the right tool. There is no distinguishing between helping, managing, and inheriting. There must be a balance between short-term convenience and long-term problem solving.

An Alternative and Better Way to Accomplish the Same Goal

There are alternatives to joint accounts, which might be a bit more work up front, but they are still convenient while letting you maintain control and intentions.

1. Payable-on-Death (POD) or Transfer-on-Death (TOD) Designations

Most financial institutions allow you to name beneficiaries while you still keep full ownership of your account during your lifetime. At your death, funds pass directly to the named beneficiaries and usually without probate.

Also, read more about the concerns with transfer-on-death deeds and why they should not be lumped in with the benefits of PODs and TODs for financial accounts.

2. Financial Power of Attorney (POA)

A financial power of attorney is a tool that allows you to name someone to help manage your finances without that other person becoming an owner. You can limit the power and even revoke it if circumstances change.

3. Revocable Living Trusts

A trust can be useful for more complicated situations or when a beneficiary needs specific protections. Trusts are a bit more work since the trust must be funded, but they provide continuity if you become incapacitated.

4. Clear Separation of Roles

The result can be one person manages the money. Another person can inherit the money. And a third person can oversee things if necessary. The goal with separating authority from ownership can often minimize misunderstanding.

Joint Accounts Do Still Make Sense in Certain Circumstances

All of this is to say, joint accounts have a place and purpose and are not inherently bad. They often work well for:

• Married couples with the goal of equal ownership.
• Small household expense accounts.
• When all parties want to share control and shared inheritance.

The ultimate thing to think about is your intentions and coordinating them with the rest of your estate plan.

A Final Thought

Before adding someone to your account, pause and ask yourself: Is this the right decision since I am also giving ownership and not just access?

The right financial and estate planning tools can provide both support while also maintaining control and ownership of your finances.

A Few Questions to Think About:

If you die first, would the money in the account go to whom you intended? If the person you add becomes ill or cognitively impaired, does the arrangement still help you? Will this joint account now expose your money to someone else’s financial or legal problems? Is there a different way to accomplish the same goal without creating a joint account?