Using Joint Accounts: Is it always a good idea?

I. Introduction to the Joint Account

Joint accounts are extremely popular because of the convenience they provide to bank customers and individual investors. Joint accounts allow two or more people to share one account, assist each other with paying bills and making deposits, and (sometimes) allow for an easy transition of account ownership when one of the joint owners dies.

However, use of the joint account in particular situations can lead to confusion, family disputes, and even litigation if the owners do not have a thorough understanding of potential risks and do not give careful thought to their overall estate plan. Worse still, well-meaning bankers or brokers that may not fully understand the legal ramifications of creating a joint account may unintentionally mislead customers with questions about setting up a joint account. This article seeks to provide some basic information for you to consider when opening a joint account. As always, you should consult with your estate planning attorney before incorporating a joint account into your estate plan.

II. Joint or Joint With Rights of Survivorship?

Most people (unfortunately this sometimes includes the banker or brokerage professional that assists the customer in setting up a joint account) have no idea that there is actually a difference between these two types of accounts. While both offer some forms of convenience mentioned above, they have very different features when one of the owners dies.

In Ohio, when two or more persons create a "joint" account, and one owner dies, that owner's share of the joint account must be administered by the deceased owner's estate representative through probate court. If the deceased owner intended the surviving owner to receive the account without probate court administration, then this was the wrong account to use. However, if the deceased owner intended his or her will to govern the distribution of the deceased owner's share in the account to other beneficiaries, then this is the correct account to use.

If two (or more) persons create a joint account "with rights of survivorship" (sometimes referred to as "JTWROS"), then the surviving owner(s) receives the entire account upon the other owner's death. The deceased owner's share in the account is NOT governed by the deceased owner's will. The surviving owner receives all of the account, and the deceased owner's beneficiaries (pursuant to the will) receive no part of the account even if the deceased owner actually intended for them to receive it. Worse yet, if the customer does not specifically tell the banker or broker that they want a "joint" account rather than a "joint account with rights of survivorship" many banks and brokers simply default to the JTWROS account without taking the time to ask the owners if that is in fact how they wish the account to be titled!

Do you see the potential problems yet? Here's one example of a misguided use of a JTWROS account:

Mrs. Smith is an elderly widow with 4 adult children. Her will provides for all her assets to pass equally to all four children upon her death. Mrs. Smith lives in an apartment and has all of her life savings in a checking and savings account. Mrs. Smith adds her daughter, Laura, as a joint owner on the account to make it easier for Laura to help her pay her bills. The banker simply assumes that Mrs. Smith wants the accounts to be joint accounts with rights of survivorship and does not inquire about Mrs. Smith's true ultimate intentions (i.e. that the accounts be distributed upon her death equally to all of her four children, not just Laura). Mrs. Smith then dies. Laura, as the sole surviving owner, receives all of the account balances and the other three children are effectively disinherited because the accounts avoid probate administration and pass directly to Laura.

If Laura chooses to keep the money and not share it with her siblings, there is very little that her siblings can do except resort to litigation to try to set aside the JTWROS designation. What if Laura decides to follow her mother's will and share the account with her three siblings? If she transfers more value to each sibling than the annual gift tax exclusion, she will incur a gift tax that she must pay in the year that she shared the accounts with her siblings. What a headache! It could have easily been avoided.

III. For Married or Committed Couples

The most common and safest use of a joint bank account or joint brokerage / securities account is by a couple that is either married or devoted to a long-term, committed relationship. The use of a joint account with rights of survivorship in such situations typically makes sense because both partners have equal access and ability to use the account to make purchases, withdrawals, and deposits. If one partner dies, the surviving owner is the owner of the account without the need to probate the deceased owner's share.

Persons that are married or in a long term commited relationship should consider whether the other owner has a high risk career or significant debt that could lend to garnishment of the account that contains assets of the innocent owner. Persons in second marriages with more complex estate plans should also be careful to consider whether a joint account is appropriate in conjunction with their overall estate planning intentions.

IV. Other Risks / Misconceptions

1) The federal and Ohio estate tax cannot be avoided by naming someone as a joint owner of an account. Both the federal and Ohio estate tax includes any amounts contributed to the account by the deceased owner that remain in the account at the time of death of the deceased owner.

2) Naming another individual as a joint owner to an account can potentially subject your assets to the claims of that other individual's creditors even if you contributed all of the account assets.

3) As mentioned earlier, your intentions set forth in your will (or trust) have absolutely NO effect on the distribution of the account upon your death if it is a joint account with rights of survivorship. The surviving owner(s) receive the account automatically upon your death regardless of whether or not you actually intended them to inherit that account.

Think carefully about whether or not to use both the "joint" account and the "joint account with rights of survivorship." Using either form of account can pose risks and problems that include those identified in this article. You should consult with your estate planning attorney before incorporating any joint account into your estate plan; especially if the joint account holds a significant amount of your assets.