The Pitfalls of Using Joint Accounts
Using Joint Accounts
By Matthew A. Ferri, Esq. Do you own joint accounts or property as joint tenants? Have you considered the planning pitfalls of this way of owning property? Ownership as joint tenants (which includes joint bank accounts) is so pervasive in our society that we never look at its downsides.
What Is Joint Tenancy?
In joint tenancy, each person owns the entire asset, not a part of the asset. This legal fiction of two or more people owning 100 percent of the same asset is derived from the full name given to joint tenancy: joint tenancy with right of survivorship. “Right of survivorship” means that whoever dies last owns the property. The previous joint tenants merely had the use of the property while they were alive.
Joint tenancy property is “uncontrollable.” Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instruction in the joint tenant’s will or trust. Joint tenancy automatically passes to its surviving owners by operation of law. If you own land or a bank account jointly with a friend or another relative, even your spouse will not inherit it when you die. The other joint tenant or joint account owner gets it all.
Why Joint Accounts and Joint Tenancy Is So Common
Because the term itself has nice connotations, joint tenancy can be a trap. It implies “the two of us,” a partnership, a marriage of title as well as love. On the surface, at least, it appears to be the right way for people who care for each other to own property. It’s psychologically pleasing, which for many people is the real advantage of owning their property jointly.
As in many other latent problems, joint tenancy is easy and convenient. Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account. The clerk who helped set up your account put it in your joint names when you answered yes to, “Both names on the account?” The same is true of your first house or your first car. It seems that all of those involved (primarily clerks and salespeople), whether or not they knew what they were doing, took control of your estate planning and titled your property in joint tenancy.
Younger single adults often own their bank accounts jointly with the parent who set up the account with them when they were minors. It’s often just easier to leave the account as a joint account even after you are an adult.
Most Common Pitfalls of Joint Accounts and Joint Tenancy
For most people, the disadvantages of joint tenancy far exceed any advantages. Some of the more devastating pitfalls of joint tenancy are:
1. There is no control, and property may pass to unintended heirs.
2. There are no planning opportunities. The joint title overrides your estate plan and tax planning.
3. For married couples, probate is at best delayed, not totally avoided. If both spouses die together, or the surviving spouse dies without a trust, then the jointly owned asset still goes to probate. The false sense of security given by joint accounts often results in couples procrastinating or avoiding necessary estate planning.
4. Loss of tax benefits generated by inheriting land or investments. With joint accounts, the survivor is stuck with the original cost basis (purchase price) of the land or investments. That means that the surviving joint account owner is responsible for all of the capital gain tax. Some or all of the capital gains tax can be avoided by the survivor if the assets are inherited from the deceased owner and not jointly owned.
5. For non-spousal owners, unintentional gift taxes and death taxes can be generated.
6. Non-spousal owners may find that they are required to include some or all of the value of the joint asset or balance of the joint bank account on financial aid forms, or when applying for government benefits. This can cause significant problems with college financial aid and Medicaid planning.
About the Author
Matthew A. Ferri, J.D., M.B.A., is the Founder and Principal of Life Focus Planning, a Michigan based estate planning law firm. He is an estate planning attorney with offices in Bloomfield Hills, Michigan and Shelby Township, Michigan.
For more information about specific pitfalls with joint accounts and on how to avoid them, please contact me at (248) 409-0256.