In an effort to make their children’s lives easier when they pass away, many people use joint ownership as a method for distributing their estate. They believe that this will be the simplest way for their heirs to inherit. In some cases, very few cases, this may be true. In most cases, however, joint ownership can have unintended consequences.
What happens with joint accounts?
Joint Tenants With Rights of Survivorship (JTROS)
When there are two or more owners on an account, and one passes away, the surviving owner(s) automatically becomes the owner of whatever was once jointly owned. If that was the original intent of the joint ownership, then joint ownership for that asset may make sense. But, joint ownership will also trump the terms of a Will. For example, if your Will states everything is to be divided into equal shares for your four children, but all of your bank accounts are jointly owned with one child, that one child is legally entitled to all of the accounts.
The joint owner may be willing to actually share the accounts but there is no legal requirement that they do so. Even if the joint owner wants to divide everything equally, they may run into IRS gifting restrictions.
Trying to evenly distribute an estate with joint ownership, rather than using a Will or a Trust, becomes more difficult as people get older. At the beginning, it can seem like a good idea. Let’s say you have four children, and purchase four $25,000 CDs – each with one child as a joint owner. Everyone will get an equal amount, and there will be no probate necessary. But, what happens if one CD is used to pay for expenses – a new car, a new roof, or needed to pay for a medical emergency? Now, one child has no inheritance, the CD has been used. Further, getting to the bank to keep everything equalized may become a problem.
Convenience Accounts: some banks will allow accounts to be set-up as convenience accounts, meaning that if the “real” owner passes away, the other person listed is not entitled to what remains in the account. Check with your bank for their policies on convenience accounts.
Jointly Owned Account May Be Subjected to Other Owner Problems
Having a joint owner means that the joint asset is as much the other owner’s as it is yours. If the joint owner runs into financial problems, and needs to file for bankruptcy, the asset is at risk. A divorce may also place the asset at risk. And, there is always the possibility that the other owner can simply take all of the money from the joint account.
Are Joint Accounts Ever A Good Idea?
There are circumstances where it may make sense to have a joint owner. Most spouses have joint accounts. If you only have one child, it may make sense to have joint accounts. Just remember that if that child is married, or having any financial difficulties, your asset may become a part of any divorce or bankruptcy process.
If you want the other owner to get that asset at your death and do not want a public record, joint ownership may be the right decision. Since jointly owned assets are not controlled by the Will, they do not pass through the probate process. Therefore, no accounting or public record will show that the joint account was received by the surviving owner.
For estate planning purposes, assets owned with any person other than a spouse can present enormous difficulties. Joint ownership can create hard feelings between children, may present IRS gifting problems, and may go against the distribution terms of your Will or Trust. It is easier to have a single document – a Last Will and Testament or a Trust – that controls the distribution of all of your assets, than trying to juggle multiple jointly owned assets.