I frequently see clients come into my office who have met with their banker and set up joint tenancy with rights of survivorship bank accounts naming another person who is not their spouse as the joint tenant on the account. Often times a client simply wants to name another person to write checks on the account. Note that there is a difference between adding another person with signature authority versus adding another person as a joint tenant. A person with only signature authority does not have ownership of the account and only has the power to write checks on the account to pay the account owner’s expenses. Often times a banker misinterprets what the client wants and proceeds to add an additional person as a joint tenant on the account.
If the account is structured as joint tenants with rights of survivorship, any of the joint tenants may withdraw funds from the account at any time and use the funds for any purpose regardless of who put the funds into the account. Also, a joint tenant does not need to have permission of the other joint tenant to make withdrawals from the account.
The creditors of any of the joint tenants may seek to collect debts against the funds in the account regardless of who put the money in the account. Examples include child support, tax liens, judgments, bankruptcy and divorce.
At the death of a joint tenant, the funds in the account automatically transfer to the surviving joint tenant regardless of what a person’s Last Will and Testament provides. The funds will not be available for the payment of the final debts of the deceased joint tenant.
Also, generally pension payments and social security benefits deposited into the bank account have various exemption protection from creditor claims. By adding another person on the account as a joint tenant who is not your spouse, such exemption protection may be lost. In addition, the setup of a joint tenancy account with another person who is not your spouse, may create Medicaid eligibility problems and will not shield assets from Medicaid reimbursement claims.
In addition, the creation of a joint account with someone who is not your spouse, may create a possible federal gift tax liability for the person who initially set up the account. Even if you have directed the joint tenant to make various distributions at the time of your death, it may be difficult for the surviving joint tenant to comply with your request due to the Federal Annual Gift Tax Exclusion Limits.
If the person who you name as your joint tenant has children who will apply for college grants, loans, and scholarships, this account will need to be reported as an available asset which may reduce the financial aid offered to them.
Another risk of joint tenancy is that the funds in the account are distributed to the surviving joint tenants and not to the children of a deceased joint tenant. For example, you may name your three children as joint tenants on a bank account with you. If one of your children predeceases you, then at the time of your death, the remaining funds in the account will be distributed to the two surviving joint tenants and the descendants of the deceased child will not receive any of the funds from the account. Such distribution may be contrary to your overall estate plan.
The bottom line is that setting up accounts in joint tenancy is a legal decision which should be discussed with your estate planning attorney to make sure that the account is consistent with your overall estate plan.
By James D. Beatty