The Perils of Joint Bank Accounts

by Kelly Karczmar on 10/07/15

JOINT BANK ACCOUNTS:  FRIEND OR FOE?

Many children assist their elderly parents with the management of day-to-day financial affairs. As an example, an adult child may review and arrange payment of their parents’ monthly bills. To facilitate this, many elderly people open joint bank accounts with their children.

This help can be indispensable. Senior citizens (particularly older seniors) are at great risk of financial abuse. An adult child can provide effective protection against this risk.

Notwithstanding this, it’s important to recognize that there are significant risks associated with joint accounts.  These risks exist even in situations where the joint account owners have each other’s best interests in mind.

Judgments and Debt Issues

If one of the account owners encounters financial hardship, then the account can be vulnerable to judgments, liens, garnishments and other debt-related hazards.

Even responsible people suffer unexpected (and sometimes dramatic) financial crises. Unforeseen medical bills, a job loss, or a divorce may render a person financially insolvent. When that happens, a joint bank account serves as an attractive resource to unpaid creditors. Joint accounts can be accessed (and even emptied!) with no recourse for the joint owner.

Divorce

If an adult child and elderly parent share an account, and the adult child divorces, the account may be considered as an available asset to be split in the divorce proceedings.

Estate Planning Confusion

Most joint accounts pass automatically to the surviving owner when the other owner(s) dies. When an elderly parent dies, the proceeds of the account will typically pass to the surviving owner(s). This may be in conflict with the wishes described in the parent’s will or trust.

Risks of Joint Access

If two or more people are joint owners on a bank account, the money in the account can be immediately accessed by any one owner. This enables one owner to empty the account without the consent of the co-owner.

This is possible despite the relative contributions of each party. As such, it’s possible that one owner could contribute 100% of the funds in the account, and those funds could all be withdrawn by the owner who did not contribute funds.

Either owner has the right to use the account funds without receiving prior approval from the other owner(s).

Tax Implications

If one owner places a large amount of money in a joint account, and another owner removes money in excess of the $14,000 annual IRS exclusion, then there may be a gift-tax filing requirement.

BETTER IDEAS:

For seniors who need help handling financial affairs: a financial power of attorney can be created. This enables adult children to handle their parents’ financial responsibilities without making their parents’ assets vulnerable to the child’s creditors, spouse, or IRS regulations.

A financial power of attorney can be written so that the adult child has immediate authority to handle affairs, or the authority can spring into existence only upon the parent’s incapacity.

To avoid probate:  You can ask your financial institution to create a “payable on death” account. This enables the account to pass directly to your beneficiaries immediately upon your death; OR

You can create a trust. Your trust declaration can be structured so that your assets are well-managed without being susceptible to the creditors of your trustee(s) and/or beneficiaries.

You’ve worked hard to build your nest egg. You should protect it to the fullest extent possible. Attorney Kelly Karczmar can help you to determine which options are best for you.