Joint Ownership: Convenience at a Cost

As people age, many look for ways to simplify their financial affairs and make things easier for themselves and their loved ones. One common approach for parents is to add an adult child as a joint owner on a bank account so the child can assist with paying bills or managing finances. However, while this may seem like a convenient solution, joint ownership, particularly outside the context of married couples, can create significant unintended consequences.

Present Ownership

One of the primary consequences of adding a joint owner to one’s account is that the new joint owner generally receives a present ownership interest in the account, which means they may legally withdraw funds at any time, even if the original owner intended that the account remain solely for their own benefit during life. Joint ownership may also trigger unintended income and gift tax consequences, potentially resulting in a loss of tax savings that might be otherwise available upon the original owner’s death.

Creditor Exposure

Another significant concern is the exposure to a joint owner’s creditors. Because joint owners generally have equal legal rights to an account, those funds can be subject to claims by each owner’s creditors. For example, if a child who is added as a joint owner later becomes involved in a car accident or other civil suit, the account may become subject to collection efforts that otherwise would not have affected the parent.

Disproportionate Distributions

Additionally, joint ownership can frustrate one’s estate planning objectives. Most joint accounts are established with rights of survivorship, which means that when one owner dies, the other becomes the sole owner of the account. Because this transfer occurs automatically upon death, outside of probate and one’s estate planning documents, like their will or trust, it may override one’s broader estate planning goals. For example, a parent may add one child to an account for convenience during life, while intending that all children share equally in the funds. Upon the parent’s death, however, the surviving joint owner will become entitled to the entire account balance.

Alternatives

Fortunately, many of the goals that lead individuals to consider joint ownership can be accomplished through alternative planning tools, without the same risks. Durable powers of attorney can authorize a trusted individual to access and manage one’s financial accounts, without granting legal ownership over the account. Similarly, if one seeks to avoid probate, it may be more suitable to add a beneficiary designation (such as a payable-on-death designation) or to transfer the account to a revocable trust.

Although joint ownership may be appropriate in some situations, such a decision should be carefully considered to avoid the unintended consequences that may follow.

Emily is a Trusts & Estates attorney. She can be contacted at [email protected] or 941-893-4014.