The Dangers of DIY Estate Planning Using Joint Accounts

Every day, thousands of elderly or disabled Americans are faced with the need to ask for assistance from a family member or friend to help with their finances when they are no longer able to drive to the bank, or have trouble managing their various monthly bills.  For many people, the obvious solution is to add the name of a caregiving family member as a joint owner on their financial accounts.  After all, this is a quick and easy way to authorize someone to write checks to get the bills paid, and it can be accomplished with just a single trip to the bank!  But this DIY “solution” of adding family members as joint owners of financial accounts can have a lot of hidden pitfalls, and very often can frustrate a person’s goals for their assets.

Naming someone as a joint owner on an account does more than simply allow them to write checks – it gives them full access to treat the account as their own.  If the new joint owner isn’t trustworthy or responsible, access to the bank accounts could be abused.  However, even if the new joint owner is a very trustworthy individual, can one be certain that the new joint owner will never have creditors seeking to gain access to their assets?  Or, that the new joint owner will never fight over money during a divorce, or will never face a tax bill they can’t afford to pay?  Adding a joint owner not only gives the new joint owner full access to a person’s accounts to help pay bills and manage finances, but it also exposes those accounts to the joint owner’s creditors.  

Another common problem with joint accounts is one that is almost never realized until it is too late to fix.  Typically, a parent will simply name a caregiving child as the joint owner of their financial accounts for convenience purposes, without understanding that their child will become the sole owner of those accounts upon their death.  In families with only one child, this is often part of the attraction of using joint accounts – after all, there’s no need to go through the probate process in order for the child to inherit the accounts.  However, in families with more than one child, the parent may not have considered that by naming only one child as a joint owner of their accounts, their other children are not legally entitled to any portion of those accounts upon the parent’s death – despite what the parent may have written in a Last Will and Testament.  Down the line, this can lead to unnecessary and emotional arguments about what Mom or Dad really intended to do with the accounts – and without proper planning, it might be impossible to know if the intent was to compensate a caregiving child, or to divide the remaining assets equally among all of their children.

What are the alternatives to naming a joint owner on financial accounts that will also allow someone to help manage those accounts?  Some banks offer a type of account referred to as a “convenience account.”  This type of account does not change ownership, but allows a second individual to be given authority to write checks from the account or make deposits.   

Unfortunately, most banks do not offer the use of convenience accounts to their depositors.  If that is the case, another common alternative is to execute a financial Power of Attorney.  With a Power of Attorney, an individual (or “principal”) can name an agent to act on his or her behalf in all financial matters.  This means that with the signed Power of Attorney in hand, the designated agent can handle all matters relating to the principal’s finances, without ever actually having an ownership interest in the principal’s assets.  An added benefit is that the agent has a fiduciary obligation to act in the principal’s best interest and in good faith, meaning that there is a possibility of legal recourse against an agent who violates his or her duties.  

Naming a joint owner on your bank or brokerage account can be a great solution, when it is done under the right circumstances and for the right reasons.  If you are thinking about using this approach, or if a bank manager suggests adding a person to your accounts, make sure that you carefully consider the benefits versus the risks before proceeding.  DIY solutions do not always work the way they are intended to work.  Many times, by using either a convenience account or a Power of Attorney, the pitfalls of joint ownership can be avoided.

Jordana Guzman is an attorney with the Estate Planning practice group at Davis, Agnor, Rapaport & Skalny, LLC. For questions about this article or other questions about estate planning documents, please do not hesitate to contact Jordana.