The Dangers of Joint Bank Accounts

Emily, 67, is seriously thinking about adding her adult daughter, Katie, as joint owner of her bank account. She is considering this because she wants to ensure that Katie would have easy access to her money in case of an emergency.

Adding a family member to a bank account seems like it might not be such a bad idea given Emily’s goals. But anyone considering doing so should be aware that simply making someone the joint owner of a bank account can have quite serious and negative unintended consequences — and it’s usually not the best solution, as I will explain.

Unexpected Issues that Can Arise from Joint Accounts

While joint accounts can be useful in certain circumstances, they can have dire consequences if not used properly. Adding a loved one to a bank account can expose your account to the loved one’s creditors as well as affect Medicaid planning. These are some unexpected issues that can arise from joint accounts:

  • Accounts are set up as typically “Joint with Rights of Survivorship”: Most banks set up all of their joint accounts as “Joint with Rights of Survivorship” (JWROS). This type of account ownership generally states that upon the death of one owner, the assets will automatically transfer to the surviving owner. In most cases, a joint account holder’s rights to the funds in the account supersedes what’s written in a will. That can lead to problems for an account holder’s heirs down the line.
  • Joint account co-owners have 100% rights to that account: Account co-owners can enjoy the right to spend, give away, or transfer funds to other accounts, without the consent or knowledge of the other account holder. No matter who started the account or who puts in the money, in the eyes of banking law, they are equal owners. This could get messy if things go sour with your co-owner.
  • There is no protection for either party with a joint account. There is nothing the bank can do to protect either party if the other person comes in and withdraws all the money. In some cases, the “wronged” party can get back some of the money, but expensive and time consuming legal action is required.
  • What happens in one person’s life can affect the other’s money: The entire amount in a joint account belongs to both joint owners on the account, so if something happens in one person’s life, it can affect the other person’s money. Here are a few examples:
    • You add your daughter as an account co-owner. If your daughter get involved in an auto accident and gets sued, your account can be considered part of your daughter’s assets, and it could be subject to garnishment in connection with a successful lawsuit against the daughter.
    • A grandparent opens a joint bank account with a grandchild to save for college, but sometime later, the grandparent faces a lawsuit or winds up in a nursing home or goes bankrupt. There is no protection for the grand child in this situation.
    • If one of the account co-owners falls behind on credit card debt and gets sued, the credit card company can use the money in the joint account to pay off the debt.
    • One of the account co-owners uses the account as collateral for a loan, then defaults.

Joint Bank Accounts Can Affect Medicaid Eligibility

When a person applies for Medicaid for nursing home care, the state looks at the applicant’s assets to see if the applicant qualifies for assistance. While a joint account may have two or more names on it, most states assume the applicant owns the entire amount in the bank account regardless of who contributed money to the account. If your name is on a joint account and you enter a nursing home, the state will assume the assets in the account belong to you unless you can prove that you did not contribute to it.

In addition, if you are a joint owner of a bank account and you or the other owner transfers assets out of the account, this can be considered an improper transfer of assets for Medicaid purposes. This means that either one of you could be ineligible for Medicaid for a period of time, depending on the amount of money in the account. The same thing happens if a joint owner is removed from a bank account. For example, if your parent enters a nursing home and you remove his or her name from a joint bank account, it will be considered an improper transfer of assets unless you can prove that all the money in the account came from you.

What You Can Do Instead

As in our example, the motivation for joint bank accounts is often rooted in wanting to take care of someone — just in case of an emergency. But you can do the same thing in other ways.

For spouses or other people you want as direct beneficiaries, you can set up brokerage accounts to “Transfer on Death” (TOD) and you can set up a bank account to “Pay on Death” (POD). Using one of these methods, when the account owner dies, the beneficiary simply needs to supply a death certificate to the financial institution for the assets to be transferred. Keep in mind that if a parent sets up an account as TOD or POD, the beneficiaries have no access to the account while the parent is still living. So, how does one plan for the event of being incapacitated?

A Financial Power of Attorney (POA) is a document that allows one or more individuals to perform financial transactions on your behalf. Ideally, this document should be drafted by an experienced elder law attorney, such as the attorneys at the Farr Law Firm. A Financial POA is a far better approach than adding someone as a joint owner to your accounts, and a Financial POA will ensure family members have access to your finances in the case of your incapacity. If you are seeking to transfer assets and avoid probate, a Revocable Living Trust may make better sense.

Be Proactive About Planning for Incapacity

Planning in advance will make things much simpler for your loved ones should anything happen. Every adult over the age of 18 should have an Incapacity Plan that includes a Financial Power of Attorney, a Real Estate Power of Attorney for each piece of real estate owned, an Advance Medical Directive (we include our proprietary Long-term Care Directive®. In addition, if long-term care is in your not-so-distant future, the time to start planning is now. Please call us at any time to set up an appointment for a no-cost initial consultation:

Estate Planning Fairfax: 703-691-1888
Estate Planning Fredericksburg: 540-479-1435
Estate Planning Rockville: 301-519-8041
Estate Planning DC: 202-587-2797

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