Be Aware of the Dangers of Joint Accounts

Joint bank accounts serve as a useful estate planning tool for passing money to loved ones outside of probate and planning for disability. But while they can achieve these goals, and are useful in certain circumstances, joint accounts also present risks.

To avoid unexpected problems, understand the pitfalls of adding a joint owner to a bank account and the alternative solutions that are available.

Why Joint Accounts Are Used

A joint bank account allows two people to own and have full control over the account. Once money is deposited in a joint account, it belongs to both account owners equally, regardless of who deposited the money. Each owner can write checks, obtain a debit card, and make purchases, deposits, and withdrawals without the other owner’s consent.

Sharing assets in a joint account can be convenient for unmarried or married couples, helping them to save, spend, and manage their money more efficiently. Opening a joint account offers, for example, the opportunity to split up monthly household expenses more easily. Having one account together instead of individual accounts also may help a couple save money toward a shared goal.

Couples, parents and children, and other family members might share an account for money management as well as estate planning purposes. Joint accounts can give them a way to plan ahead in case one account holder becomes unable to handle their affairs. It also allows them to transfer assets without going through probate, the court process for distributing a deceased person’s assets.

A parent, for example, can add a child to an account to give the child access to money if the parent becomes disabled. The child can then pay bills and manage money for the parent. And when the parent dies, the entire account passes to the child without having to involve the court.

The Risks of Joint Accounts

The most obvious red flag of a joint account is that you must be sure you trust the other owner, since they will have full access to the account. But joint accounts also have some less-obvious risks that include the following:

Joint Accounts and Creditor Issues

A potential issue with joint accounts is that it makes the account vulnerable to all creditors from each owner. Creditor issues affecting one owner therefore affect the other owner.

Suppose you add your daughter to your checking account, and she later falls behind on credit card payments. The credit card company sues her to collect the debt.

In this scenario, the credit card company can obtain the money in the joint account to pay off your daughter’s debt. That is, your money can be used to service her credit card debt — and any other debt she might accrue, such as mortgage debt, student loan debt, auto loan debt, and medical debt.

With the average American owing around $10,000 to $30,000 in non-mortgage debt, this is a real possibility. Young people tend to owe more debt, and have higher delinquency rates, than older borrowers.

Joint Accounts and Medicaid Eligibility

Joint accounts can also affect Medicaid eligibility.

When a person applies for Medicaid long-term care, the state looks at the applicant’s assets to see if they qualify for assistance. While a joint account may have two names on it, most states assume the applicant owns the entire amount in the account, regardless of who deposited money into it.

In most states, you must have less than $2,000 to your name to qualify for Medicaid. 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 them. If you can’t meet the state’s burden of proof, you could fail their means-tested eligibility criteria for Medicaid.

Not only that, but if you are a joint owner of a bank account and you or the other owner transfers assets out of the account, this may be considered an improper transfer of assets for Medicaid purposes. As a result, either one of you could be temporarily ineligible for Medicaid, depending on the amount of money in the account.

A similar risk arises if a joint owner is removed from a bank account. If your spouse enters a nursing home, for instance, and you remove their name from the joint bank account, it could be considered an improper transfer of assets.

Other Potential Joint Account Issues

In addition to creditor and Medicaid eligibility issues, joint accounts can pose problems related to: 

• Divorce: The money you have in a jointly owned account may be subject to a division of assets in a divorce proceeding. In other words, you could see your money end up in the hands of a former son- or daughter-in-law.
• Conflict with your will: Joint account status typically overrides any instructions you leave in your will about whom you want inheriting your assets. Your will might state that you want to divide your assets equally among your children. But a jointly owned account belongs to the surviving owner, despite what your will says. As a result, division of those assets may not follow the will’s terms.
• Taxes: Adding a person other than your spouse to a bank account can trigger the federal gift tax. This might happen if a parent makes a child an account co-owner and the child makes a withdrawal above the annual gift tax exclusion amount ($18,000 in 2024).

Alternatives to Joint Accounts for Estate Planning

Joint accounts can provide benefits to your estate plan, but this should not be their primary purpose. The risks are likely to outweigh any advantages they provide for disability/incapacity planning and probate avoidance.

A power of attorney will ensure family members have access to your finances in the case of your disability. And if you are seeking to transfer assets and avoid probate, a trust may make more sense.

Not all joint accounts are the same, either. Structuring an account as a “Transfer on Death” account, rather than as a “Joint With Rights of Survivorship” account, will give a beneficiary access to it only after you pass away, thus skipping probate while avoiding potential gift tax issues.

To learn more about joint accounts, estate planning, and the best way to structure a plan for your situation, work with your estate planning attorney.