Five Reasons Why Joint Accounts May Be a Poor Estate Plan

Writing A Check

Many people view joint ownership of bank or brokerage accounts as an easy and inexpensive way to avoid probate since joint property passes automatically to the joint owner at death. Joint ownership can also be an easy way to plan for incapacity since the joint owner of accounts can pay bills and manage investments if the primary owner gets sick or becomes incapacitated. Although joint accounts make sense for some assets like a primary residence for married couples, there are five drawbacks as well such as:

  1. Creditor Risk. Joint owners of accounts have complete access and the ability to use the funds for their own purposes. In addition, the funds are available to the creditors of all joint owners. If a senior applies for Medicaid or other public benefits half the joint account could be considered as belonging to them as well as the other joint owners.
  2. Inequity Regarding Other Beneficiaries. If a parent has one child on certain accounts, but not all children, at death that one child may end up inheriting more than the others. While the parent may expect that all of the children will share equally, and often they do in such circumstances, there’s no guarantee.
  3. Unexpected Death of Joint Owner. A system based on joint accounts can fail if a child passes away before the parent. Then it may be necessary to set up a trust to manage the funds or they may ultimately pass to the surviving siblings with nothing or only a small portion going to the deceased child’s family. For example, a mother put her house in joint ownership with her son to avoid probate and Medicaid’s estate recovery claim. When the son died unexpectedly, her daughter-in-law was left high and dry despite having devoted the prior four years to caring for her husband’s mother.
  4. Loss of Control. If a parent adds a child to an account making it a joint account, that parent may lose control over the account and decisions may be made without his consent. The problem with that is the child can withdraw all of the money, regardless of their contribution to the account.
  5. Income Tax Considerations. The beneficiaries do not get the full stepped up basis for income tax purposes when they inherit jointly owned real estate. Therefore if they later
    sell the house they will have to pay federal and state income taxes on the capital gain which is 14% to 19% higher than Pennsylvania inheritance taxes.

Joint accounts do work well in two situations. First, if you have only one child and want everything to go to him or her, joint accounts can be a simple way to provide for succession. It has some of the risks described above, but for most people the risks are outweighed by the convenience of joint accounts. Second, if you put one or more children on your primary checking account to allow them pay the recurring monthly bills and have access to funds in the event of incapacity or death. However, for the rest of your assets, wills, trusts and durable powers of attorney are much better planning tools. They do not put your assets at risk. They provide that the estate will be distributed according to your wishes or in the event of a child’s incapacity or death. In addition they provide for asset management in the event you become incapacitated. If you do not have these documents or have any questions please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

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