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What Is It?

A joint bank account lets you name a co-owner for your bank account. Funds in the account transfer to your co-owner automatically if you die. Your estate avoids the expenses and delays of probate. Holding checking and deposit accounts as joint bank accounts can be a simple and inexpensive way to transfer funds immediately upon your death. It guarantees your spouse (or other co-owner) continuing access to the family checking account to pay monthly bills. Joint tenancy accounts and revocable joint accounts are other names for joint bank accounts.

When Can It Be Used?

Can Be Used Only To Transfer Funds on Deposit in the Appropriate Bank Account

As the name suggests, a joint bank account transfers only funds that are actually held in the joint bank account.

Not All States Exempt Joint Bank Accounts from Probate

Some states only recognize joint bank accounts for spouses. Others allow joint bank accounts while both owners are alive, but subject the account to probate at death.

Strengths

Can Help You Avoid or Minimize the Expense of Probate

Probate can be expensive, and the largest expense is generally the attorney's fees. These fees can be especially expensive if set as a percentage of the gross probate estate. If you could avoid probate with a joint bank account, your estate would avoid these fees.

Tip: Negotiating an hourly rate or flat fee can result in a more reasonable fee.

Caution: A joint bank account can pass only the funds that are in the account at the time of your death, which will generally represent only a very limited portion of your estate.

The person responsible for managing your estate during the probate process (your executor) is entitled to a fee for these services, although a friend or relative serving as an executor may agree to serve without a fee.

Minimizes Delays in the Transfer of the Account

Probate takes an average of 12 months and may last for several years. Transferring funds automatically by holding them in a joint bank account provides for a quicker, almost immediate transfer of the money.

Example(s): Tom writes a best-selling novel and earns $1,000,000. He puts the money in a joint bank account and makes his brother, Kevin, the co-owner of the account. Tom made Kevin his co-owner because Kevin isn't able to work. Tom dies. Kevin is now the sole owner of the account, and is entitled to walk into the bank the next day and withdraw the entire $1,000,000.

Discourages Interference with Your Plans to Distribute Your Property

Although it seems that anybody can bring a lawsuit, a will is generally much easier to challenge than a transfer through a joint bank account.

Circumvents Some Limits on Your Power to Transfer Property

State law may limit your ability to leave property to charity. For example, some states invalidate any bequest to charity written within a month of your death. Other states won't let you to leave more than a certain percentage of your property to charity. These laws sometimes don't apply to money transferred automatically through a joint bank account. State law may also force you to leave a certain percentage of your property to your spouse. In some states, these laws don't apply to transfers of money through a joint bank account.

Provides For Management of the Account If You Become Incapacitated

If you become incapacitated, your co-owner will be able to control the money in your joint bank account on your behalf.

Tip: A durable power of attorney provides another option for managing your affairs if you become incapacitated.

You Retain Access to the Account and Can Revoke It until Your Death

You retain the right to use or withdraw funds in the account, to change the terms of the account, to add or remove names to the account, or close the account entirely until your death.

Caution: However, your co-owner also has unlimited access to the funds. You can only close the account and keep the money if you do so before your co-owner gets to it.

Simple and Inexpensive to Create

Signing the appropriate forms with the bank and making the necessary deposit are the only steps necessary to create a joint bank account.

Convenient For Couples and Others with Shared Expenses

The joint account will allow couples who share all assets and liabilities to share access to their assets and pay expenses from those combined funds. Couples may also choose to hold a joint account because of the implicit trust reflected in such a choice.

Tradeoffs

You Lose Some Control over the Funds

Once you create a joint bank account, the bank won't stop your co-owner from taking money out of the account. There is always a possibility that your co-owner will take funds from the account without your permission.

Tip: You may reduce this danger by not telling your co-owner about the account or holding the document (such as a passbook) necessary to access the account. However, not all banks will allow this.

By creating a joint bank account, you also expose the account to your co-owner's creditors.

Does Not Avoid Estate Taxes

Your share of the funds in the account is subject to estate taxes. If you are married to your co-owner, your share generally will be 50 percent regardless of your actual contribution, and your share will be sheltered from estate tax by the marital deduction. If your co-owner is not your spouse, your share of the account will be 100 percent unless your estate can prove otherwise.

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Does Not Avoid Other Costs Arising At Death

Avoiding probate may avoid some of the expenses that typically arise at death, but certainly not all of them. Your estate will be responsible for your outstanding debts. Holding your money in joint bank accounts does nothing to avoid these expenses or provide resources to pay them.

Recipient of the Funds Is Not Protected From Your Creditors

The probate process requires that all claims against your estate be presented within months of your death, preventing delayed claims against your estate and beneficiaries. However, a creditor may, depending on the state, be able to bring a claim against property that passed to the co-owner of your joint bank account for years after your death. Check your specific state's law.

Technical Note: The statute of limitations is a rule that prevents lawsuits that haven't been brought quickly enough. Someone can sue you (or your estate, if you are dead) until the statute of limitations for that claim has expired. For example, if the statute of limitations for a breach of contract lawsuit is seven years, the Record Club has seven years to sue you for failing to buy that seventh cassette. However, if your property passes through probate, that property is immune from claims by your creditors when the special short statute of limitations that applies to decedents has run (commonly a year or less after death), regardless of whether the claim would otherwise be barred by the statute of limitations.

How to Do It

Verify That a Joint Bank Account Will Not Be Subject To Probate in Your State

Some states subject all joint bank accounts to probate. Others may authorize only joint accounts between married couples, while others allow joint bank accounts during the client's life but require that the account be probated at either owner's death. Check with your bank, attorney, or financial advisor if you are unsure whether your joint bank account will go through probate in your state.

Create Account with Bank

Your bank will have information on what types of joint accounts are available and how to create one.

Execute A Will Even Through Property Is Held As Joint Tenants

Even though a joint bank account is referred to as a will substitute, it can transfer only the contents of a particular bank account at your death. You still need a will to dispose of the remainder of your property. Otherwise, you will die intestate.

Maintain Records of Contributions and Withdrawals

Your share of the account will be included in your gross estate at your death. Since you are presumed to have owned the entire account at your death (except to the extent you can prove otherwise) if your co-owner isn't your spouse, accurate records of each owner's contributions and withdrawals should be maintained to establish the correct percentage of ownership at death.

Example(s): Jen and Kathy are co-owners of a joint bank account with a $100,000 balance. Jen contributed $75,000 to the account, but Kathy only contributed $25,000. Unfortunately, neither kept records on who made the contributions. Kathy dies. The full $100,000 is included in Kathy's gross estate, even though she contributed only $25,000.

Tax Considerations

Income Tax

Generally Does Not Shift Income

During your life, any interest generated by the account is your responsibility unless you have irrevocably given part of the account to your co-owner. If you have, the interest is divided in proportion to each account holder's interest.

No Gift Tax Unless You Give Co-Owner Rights to the Funds

Creating a joint bank account generally does not result in a gift tax.

Caution: You will have made a gift, subject to gift tax, at the point where the person you named as a co-owner withdraws the funds, or where your transfer of funds to him or her otherwise becomes complete.

Technical Note: Your co-owner has the right to withdraw funds from the account if you have a contract giving him or her that right. Of course, you will have effectively given your co-owner the right to the funds if you remove your name from the account.

Estate Tax Will Be Assessed on Your Interest in the Account

Since you had control over the joint bank account at your death, your share of the funds in that account will be subject to estate taxes. If you are married to your co-owner, your share of the account generally will be 50 percent of the funds. There is no tax liability because of the unlimited marital deduction, but there is also no use of the applicable exclusion amount (formerly known as the unified credit). If your co-owner is not your spouse, your share will be 100 percent unless your estate can prove that you contributed less than 100 percent to the account. If the joint tenants are not married and die within a short time of each other, the account funds could be included in the gross estate of each account holder.

Questions and Answers

How Could Estate Taxes Be Assessed on a Joint Account More Than Once?

In most states, a statute provides that when joint tenants die simultaneously, 50 percent of the value of the joint account will be deemed to be owned by each tenant. However, the federal Tax Code requires that 100 percent of the value of jointly held property held by nonspouses be included in your estate unless the estate proves that someone other than the decedent furnished the consideration. Therefore, if two individuals jointly hold an account, and neither can prove that the other furnished and consideration, 100 percent of the account may be included in the estate of each account holder.

Your Bank Offers an "Accommodation Bank Account." Is It a Type of Joint Bank Account That Avoids Probate?

Generally, no. An accommodation bank account allows you to let someone else manage your bank account for your benefit. However, at your death the account isn't payable to that person. Instead, it is owned by your estate and will be subject to probate.

Why Isn't a Joint Bank Account Subject to Probate?

Funds held in a joint bank account are paid automatically to the surviving owner at your death. Since you don't own the account after your death, it is not subject to probate.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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