Joint Accounts: Rights of Survivorship and Alternatives Explained

Joint accounts are a good idea when planning for the possibility that your parents will require financial assistance in their later years.

Most parents who inquire about this want to ensure that their kids have access to some of their savings in case of an unexpected expense. It should be a straightforward procedure, and with careful preparation, it can be. At the same time, it may seem like a good idea amid a family crisis, but making a child a joint owner of a bank account (or investment account or safe deposit box) can have unforeseen effects.

Problems Associated with Sharing a Bank Account

Most banks’ default account designation for joint checking and savings accounts is “Joint With Rights of Survivorship” (JWROS). When two people own an account jointly, upon the death of one of them, the other takes control of the account automatically. Some unforeseen problems may arise as a result of this.

  1. The assets not used to alleviate the family issue will not be dispersed according to the will’s instructions. Regardless of the terms of your choice, your possessions will pass on to your surviving spouse as was previously indicated.
  2. There may be a problem with federal gift taxes if you add anyone outside your spouse. If a U.S. citizen makes a gift to someone other than their spouse that exceeds $17,000 in 2023, the donor may be required to submit a gift tax return. If a parent with a $500,000 account converts it to a JWROS account and names their child as co-owner, and the child withdraws $20,000, the parent has effectively given the child a gift of $3,000.
  3. For state inheritance/estate tax reasons, if a parent adds a child to their $500,000 savings account and the child dies before the parent, a portion of the account value may be includable in the child’s estate. In this case, ownership of the account would revert to the parent, and state inheritance tax could be owed on as much as half of the account’s value, depending on the deceased’s state of residency. My company is based in Pennsylvania, where the inheritance tax on a bequest to a descendant is 4.5 percent.

Transfer on Death Is the Best Option

There is a better approach to ensure that your loved ones will have access to your assets after your passing than by making them a joint owners of your account(s). You can set up a “Transfer on Death” (TOD) with most banks and credit unions. All you have to do is name a beneficiary or beneficiaries. This type of account has a few advantages over a JWROS account.

  1. The account will remain dormant if the beneficiary does not survive the account holder(s). Any potential liability for the 4.5% state inheritance tax on the value of the account shown in the previous example would be eliminated.
  2. If the account holder passes away, the beneficiary can quickly transfer the funds by providing the bank with a copy of the death certificate. Because the assets go directly to the person or organization you designated as the beneficiary, you save time and money by avoiding the probate process. This is true not only for transfer on death accounts but also for 401(k)s, IRAs, UIFAs, and life insurance policies.
  3. A beneficiary can only access an account designated as TOD after the account owner has passed away (s). Hence, the possible federal gift tax issue is resolved because the IRS does not regard the titling change as a gift.

Having a power of attorney over your finances is another option.

As was previously said, if a parent sets up an account as TOD, their children will not have access to the funds so long as the account’s owner(s) are still alive. To what extent should one prepare for the possibility of incapacity?

A financial power of attorney is a legally binding document that gives another person or persons the legal authority to act on your behalf in financial matters. I usually advise my customers to have a professional lawyer create this document. The need for legal representation to delegate monetary authority to another person is eliminated when you use one of the many banking institutions’ internal financial power of attorney forms. In many situations, granting someone power of attorney over financial matters is preferable rather than making them a joint owner of your accounts.

  1. A couple cannot contribute to a single retirement account. There can only be one owner of a retirement account, 401(k), annuity, etc.; adding a second owner is not an option. Many parents plan for their children to have access to all of their assets, not just their bank accounts if they become disabled.
  2. A replacement might be implemented if the person you appoint cannot carry out their duties. You can make provisions for a replacement agent either when you complete the power of attorney documents or by amending them later.
  3. You can delegate real estate transactions to your financial power of attorney. One common scenario is a child assisting an aging parent with important life decisions like selling or purchasing a home. This is especially true in cases where the parent is suffering cognitive difficulties. One or more of the parent’s children could negotiate conditions and sign on their behalf if they had granted them financial power of attorney (when the parent was still healthy).

Most financial institutions scrutinize the appointment of an economic power of attorney. In most cases, the institution’s legal department will want to evaluate the document before authorizing the designated individual(s) to make financial transactions. As this procedure can take weeks, the family may only have access to the funds after a while if they need them for an unexpected expense. Have your financial power of attorney in place by ensuring all your financial institutions have a copy of the signed document.

A Perfect Blend of Features

It’s not a good idea for parents to make their children joint owners of bank accounts “just in case” something happens to them. Transfer on Death account titling and appointing a financial power of attorney are often preferable alternatives. Doing both can protect the family from nasty tax surprises and give the kid more financial freedom when needed.

Though we hope a long time passes before “anything happens,” we should all be prepared just in case. Please don’t make assumptions or try to figure out the regulations independently; they’re complicated.

Discuss your goals with a financial advisor or estate planning attorney and follow their advice. If something were to happen to you, having a plan would make things much easier for your loved ones.