Many people employ the use of joint financial accounts as a matter of convenience, such as an elderly parent placing a child's name on the parent's checking account so that checks and deposits can continue if the parent is travelling or incapacitated. There is nothing necessarily wrong with this, but many well-meaning people are uninformed about the consequences of placing a non-spouse on their financial accounts.
Losing Control of the Account.
Requiring that withdrawals from the account require all the signatures of all the joint owners is entirely inconvenient, but allowing withdrawals upon the signature of any single owner of the account subjects the account to being emptied on the action of any one individual. This can leave a parent's funds at risk of being depleted without any authorization from the parent.
Defeats the Provisions of a Will or Trust.
Consider an additional problem of joint accounts: Betty has three children, Alex, Sean, and David. Sean and David live in the same town as Betty but Alex lives several hundred miles away. Betty adds Sean and David's names to all of her financial accounts for the sake of convenience in the event she can no longer manage her financial affairs. Betty's last will and testament provides that everything is to be divided equally among her three children, but, upon Betty's death, Sean and David, as the surviving joint tenants of the financial accounts, receive all of the remaining cash in the accounts, leaving Alex completely out of any right to the cash in the accounts. The surviving joint owners inherit the balance in the accounts by operation of law and there is no obligation imposed on the surviving joint owners to share the cash. This has caused many problems and disagreements among family members.
Account Balance and Other Information is No Longer Private.
All joint owners are entitled to receive quarterly or monthly statements showing the account activity. This may include in-laws and other family members seeing the account information if statements are sent to the other joint owners. This information can be used in various ways to exert control over the parent that may not be appropriate and the parent's financial transactions are no longer private.
Account is Vulnerable to All the Account Owners' Creditors.
Joint owners are at potential risk of taking on the other joint owners' personal liabilities. The creation of the joint ownership gives the joint owners property rights. If a joint owner is sued, goes through a divorce, or files for bankruptcy, a court or a collection agency can scrutinize these accounts. (Michigan Compiled Laws 487.718). Although there are defenses available, such as if a joint owner has not made any contribution to the account at issue, it costs time and legal fees to make the argument to the court. Parents who add a child’s name to their financial accounts do not do so with the intent that the account be subject to the child's creditors but the potential is risk is real.
When an individual dies and owns an account jointly with someone other than a spouse, the IRS will attribute the entire value of the account to the joint owner who was the original owner (usually, this is the parent). An exception is if a joint owner can provide proof that the other joint owner contributed to the money in the account. Additionally, a gift tax problem can arise. If a father adds his daughter as a joint owner of an account worth $50,000, the father has given a gift of one-half the value of the account. The amount is exempt from the federal gift tax if the father has not used up his lifetime gift tax exemption. It is also exempt from the federal gift tax to the extent the amount can applied toward the annual gift tax exclusion amount of $13,000. However, if neither of these exceptions apply, then the $50,000 is subject to federal gift tax.
Individuals who create joint tenancies are also creating potential problems that include loss of control, additional liability, and other dilemmas not normally contemplated when the joint owners are added to the account. A better way to plan for incapacity and disability is to consult with an attorney and request a durable power of attorney that names a trustworthy individual to act on your behalf. In addition, many of the goals that joint ownership accomplishes can be gained with the preparation of a living trust without the problems of joint ownership. A living trust allows the individual to retain control of the assets during his or her lifetime while, at the same time, it provides for the appointment of a successor trustee to manage the assets in the event of incapacity. Upon death, the assets pass to the named beneficiaries that have been designated. The living trust can also avoid the potential gift tax problems. If you insist on making an account joint for convenience purposes, keep the balance of the account low and be aware that creating a joint account has consequences that you may not intend.