Clients often want to add another person, frequently a child, as a joint account holder to a financial account, thinking it is a simple administrative act, enabling that person to have access, and eventually complete control and ownership of the account. However, they are often unaware of the potential significant financial and legal consequences which can occur.
Ownership Transfer
The new joint account holder has full legal ownership of the account assets, which provides the ability to withdraw funds without the other joint-holder’s consent, or even notice. Once funds are withdrawn, there is often no recourse to reverse the transaction.
Exposure
A new joint account holder exposes the account assets to its creditors, lawsuit liability, child support garnishment or bankruptcy proceedings. A financial account could be levied or frozen, regardless of the origination of assets.
Changed Relationship
If a new joint account owner is involved in a divorce or legal dispute, the account could become entangled in litigation. If a fractured relationship develops between joint owners, it cannot simply be unilaterally undone. Once an individual is added as a joint owner, the banks may require both parties’ signatures to remove a joint owner or close the account.
Gift Tax Consequences
The addition of a joint account owner can trigger a federal gift tax obligation. Internal Revenue Service rules dictate that if a joint account owner withdraws funds for their own benefit, it may be treated as a taxable gift which may necessitate the filing of a Gift and Generation-Skipping Transfer Tax Return.
Estate Planning Complications
Many joint accounts include a “right of survivorship,” whereby the surviving account owner automatically inherits the account at the death of the co-owner. While this can avoid probate, it may unintentionally disinherit other beneficiaries, override your will or trust and create family disputes. Hence, joint account ownership can undermine a carefully drafted estate plan.
Alternatives to Consider
There are some alternatives to consider, especially if the goal is convenience rather than ownership.
Options include adding an individual as an authorized signer, creating a durable power of attorney, utilizing a revocable living trust, or creating a payable-on-death (POD) designation. These choices can provide access or transfer benefits without giving up ownership.
Adding a joint account holder to a financial account doesn’t simply create an easier way to manage your money, or a workaround probate or estate planning issues. Rather, it legally transfers assets, and access to them, to another person. This may create unforeseen consequences that threaten the security of those assets.
Before proceeding, it is wise to speak with an estate planning attorney to ensure the decision aligns with your long-term goals and protects your assets. Chauvel & Glatt’s experienced California estate planning attorneys can assist in explaining this information and developing strategies to maximize your wealth and the future transfer to others. This material is provided by Chauvel & Glatt and is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute legal advice. For information on your particular circumstance, please contact Chauvel & Glatt at 650-573-9500.
