If You Think Joint Accounts Are An Effective Estate Planning Technique, Think Again.
Joint accounts with banks, credit unions or other institutions are widely used and accepted and they certainly have their place. However, far too often, joint accounts are used as a substitute for proper estate planning. Joint accounts with family members or others are often touted as a way to pass property to intended beneficiaries automatically at death without the need for a will or a trust or going through the probate process. Joint accounts can be easily set up when opening the account by simply making an election on the account agreement. However, a bad idea easily implemented is still a bad idea.
What’s wrong with joint accounts from an estate planning perspective?
1. Most people don’t know what kind of joint accounts they have?
a. With or without a right of survivorship? In order for a joint account to pass property to the surviving account holder at the death of another account holder without going through probate, the account must specifically state in the account agreement that it is a survivorship account. Most account agreements will have a space where the account holders sign or initial to specifically elect to create a right of survivorship. If the account holders do not affirmatively make this election, then the account is simply a joint account. What does that mean? At the death of one account holder, his share of the funds becomes part of his probate estate and passes according to his will if he has one and according to the Intestate Succession Act if he doesn’t. Probate is not avoided.
b. Which statute applies or is it a common law survivorship account? Why does it matter? In North Carolina, there are a number of statutes governing joint accounts, including N.C.G.S. §41-2.1 , N.C.G.S. §53C-6-6 , and N.C.G.S. §54-109.58 (applying to credit unions) in addition to common law survivorship accounts. They all differ slightly in the rights of the joint owners (and their creditors) to the funds in the account. Accounts opened under N.C.G.S. §41-2.1 provide that the funds in the account are only subject to the debts of each account holder to the extent of that account holder’s contribution to the unwithdrawn amount remaining in the account. If the amount of each owner’s contribution can’t be determined, they are treated as if they own the funds equally. That is quite different from accounts opened under the other two cited statutes as you will see below.
2. Assuming you have a survivorship account and you know which statute applies, what is wrong with a joint account?
a. Each and every joint owner can withdraw any amount or all of the funds held in the account regardless of who deposited the funds in the account unless the owners agree with the bank in writing that more than a single signature is required. The danger of such an arrangement should be obvious: someone other than you has the right to withdraw all of your money and there is absolutely nothing you can do to get it back. It is not stealing, because you gave them the right to withdraw the entire balance when you opened the account.
b. Funds in the joint account are subject to the claims of and can be seized by the creditors of the other owners. N.C.G.S. §§53C-6-6 and 54-109.58 specifically provide that, unless otherwise agreed in writing with the bank, any owner of the account can pledge or transfer the account as security for a debt. N.C.G.S § 41-2.1 limits this amount to each account holder’s contribution. However, if relative contributions can’t be determined, which is frequently the case; the owners are treated as owning the funds equally. If you contribute most of the funds to the account, absent very clear and detailed records, you stand to lose at least half of what you contributed. Further, all three statutes provide that the bank or credit union is not liable for complying in good faith with a writ of execution, garnishment, attachment, levy or other legal process issued against one or more of the joint account owners. IRS procedure specifically requires that a bank turn over 100% of the funds in a joint bank account if the IRS issues a garnishment notice against any of the owners.
c. You could accidentally disinherit family members. It frequently happens that a parent will open a joint account with right of survivorship naming one child as an owner of the account because that child helps the parent manage their day to day affairs and helps them pay bills. Joint accounts with right of survivorship are not probate assets and, therefore, are not controlled by the terms of a will. Accordingly, when the parent dies, the funds in the survivorship account pass to the child listed as an owner of the account to the exclusion of all other children. If most of the deceased parent’s estate is in such joint accounts, the non-account owners are effectively disinherited.
d. The person you designate as the other joint owner could die before you. Everyone assumes their children will outlive them, but it does not always happen that way. It is not difficult to imagine a situation in which a grieving parent mourning the loss of a child forgets to add another joint owner to the account after the co-owner child dies. If probate avoidance was a reason for the joint account, that purpose is frustrated and probate is not avoided.
Does that mean joint accounts are bad and that I shouldn’t have them?
No, I am not saying that joint accounts, whether with or without a right of survivorship, are bad. Joint accounts are quite useful and effective when used in the appropriate circumstances and with a full appreciation of the consequences of joint ownership. What I am saying is that joint accounts are simply far more limited in their effectiveness and have far more risks as an estate planning technique than most people realize.
What do I do, then?
Integrating your assets into an effective estate plan that accomplishes the goals of managing your property efficiently during your lifetime and distributing your property according to your wishes at death can be a complex and daunting task. It takes knowledge, skill and experience to balance the legal issues with family dynamics to create the estate plan that will work for you. I will listen to your concerns and help you develop a plan to give you peace of mind and accomplish your goals for your family. Please contact me today for a consultation.