3 Risks of Joint Bank Accounts You Might Not Know About

by Rev. Bill Gruenewald

If you’re married, you might already have a joint bank account with your spouse. They’re a great way to conveniently share assets, allowing both people to conduct business with the account. Typically this works out well for married couples, but it can get tricky when the joint owners are not spouses. This usually happens with older adults who would like their adult children to help manage their banking.

Unfortunately, many people are unaware of the risks involved. While joint accounts with non-spouses certainly make things like paying bills and communicating with the bank easier for the original account owner, it can also complicate matters in a few specific ways. A joint account could still be the best choice for your circumstances, but it’s important to understand all the advantages and disadvantages so you can make an informed decision.

Risk #1: Unintended inheritance

In most standard joint accounts, if one owner dies, the joint owner will take ownership of the assets in the account, irrespective of what the deceased’s estate plan directs. So in the case of an older adult and his or her adult child, this could become problematic. 

For example, let’s consider Martha, who has three children. Her son Paul lives in the same town, so for convenience, Martha adds him to her bank account. She wants him to have the ability to “write checks and talk to the bank” if needed. Martha also has a will that directs her Executor to divide her estate equally among all three of her children when she passes. But the terms of the joint bank account state that the money in the account will bypass the provisions in the will, so whatever money was in the account at Martha’s death will now become Paul’s — on top of a third of his mother’s estate, which he still receives through the will. Though it was not Martha’s intention, Paul is now the new legal owner of the money in the account and does not have to divide it with his siblings. This could certainly cause tension within the family, but even if the siblings work it out, it can be complicated to address and doesn’t align with Martha’s wishes for her assets.

Risk #2: Unexpected creditors

A creditor has the right to access bank accounts owned by a debtor to pay a debt on which they’ve defaulted, regardless of how the debtor became an owner of the assets. So taking another look at Martha and Paul, let’s say Paul has a creditor looking for assets to seize. The joint account with Martha can be taken for Paul’s debt, even though Martha had nothing to do with the debt. Another complicated scenario can arise if Paul goes through a divorce, because it’s possible the joint account could be brought into the proceedings. Even if Martha can successfully prove the account is not part of Paul’s marital estate and keeps the money, the favorable result may only come after the stress and expense of intervening in Paul’s divorce. 

Risk #3: Unrestricted access

When you add someone to your account, the person gets full clearance and rights. It’s therefore extremely important that the new owner can be completely trusted. Unfortunately, sometimes unrestricted access to the funds can be too great a temptation. If a situation arises in his or her life in which he or she needs money, the new joint account can become a source of those funds. Even if he or she expects to repay the money, the reality is the money may never come back into the account. And the new joint owner has done nothing wrong legally, because on paper they are an equal owner of the assets.

If you’re reviewing these risks and reconsidering a joint account, there are a couple of alternatives that can still achieve similar practical goals:

• Power of Attorney (POA): Through a POA, the account owner grants a person (known as an Agent or Attorney-In-Fact) either general or limited authority to transact any business that the account owner can or could do on his or her own. The Agent has access to bank accounts (usually along with other financial assets) but is never the owner. Thus, since the Agent is not an owner, the survivor’s Last Will and Testament will still control the ultimate disposition of the bank accounts, and none of the Agent’s creditors will have access to the survivor’s funds. Check with your bank to make sure you use the proper POA document.

• Authorized signer: Naming a person as an authorized signer on the account gives them access to the account without being an owner. An authorized signer requires a special designation on the account’s signature card. Financial institutions will have specific procedures to make this type of appointment. 

Joint ownership with a non-spouse is not always a bad idea. In fact, when used properly, it can be an effective way to ensure someone gets an inheritance and an efficient technique in avoiding probate court. The key is to ensure the survivor is fully informed of the pros and cons before making this decision. 

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Please note that the advice offered in this article is not intended to be construed as tax, legal or accounting advice. This material has been prepared for general informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice for the reader. You should consult your own tax, legal and accounting advisors before engaging in any transaction.