Think Twice Before Adding Someone to Your Account
By Bernard A. Krooks, Certified Elder Law Attorney
Special Guest Contributor: Amy C. O’Hara, Certified Elder Law Attorney
Clients often ask, or tell us, “I’ve put my daughter on my accounts because when I die, I know she’ll need money right away to pay for my expenses. I trust her and she always does the ‘right’ thing. Afterwards she will divide what’s left equally among all my other children, in accordance with my wishes.”
At first glance, this arrangement might seem straightforward. However, there may be significant risks associated with adding someone as a joint owner to your account. Here’s why:
Adding someone to an account typically means “Joint with Rights of Survivorship.” With this setup, when any account owner passes away, the funds automatically transfer to the surviving owner(s). While this can seem convenient, there are several potential pitfalls.
Sharing an account means losing sole control over your funds. One account holder can withdraw or spend money without the other’s consent, potentially leading to disagreements. The co-owner may choose to distribute the funds differently or use them entirely for personal purposes, even if your will or trust specifies otherwise. Recovering such funds may involve costly legal battles, and suing a family member is often emotionally difficult and financially draining.
If the co-owner overspends or mismanages the account, it can jeopardize your financial goals and create tension. Joint account holders are equally responsible for any overdrafts or debts associated with the account, regardless of who incurred them. If the co-owner faces financial difficulties, such as lawsuits or creditor claims, your account could be targeted. Even if you prove the assets are yours, resolving such disputes can take time, money, and legal intervention.
In the event of complications in the relationship with the co-owner, depending on the account setup, you may not be able to remove the co-owner without their consent.
There could be tax consequences if the account has appreciated investments. If a co-owner is added during your lifetime without purchasing their share of the assets, they inherit your original basis in the investments. This could result in significant capital gains taxes when selling assets.
To minimize these risks, consider the following options:
Maintain a small balance in joint accounts to limit potential financial and legal risks.
Use a transfer on death (TOD) or in trust for (ITF) designation. These accounts name a beneficiary to receive the funds upon your death, without granting them access during your lifetime. While this avoids some drawbacks of joint accounts, the beneficiary can still use the funds as they see fit after your death.
Establish a living trust, sometimes referred to as a revocable trust. A living trust allows you to designate a successor or co-trustee who will have access to accounts if you become incapacitated and after your death. Trustees are legally bound to follow the trust’s terms, ensuring your wishes are honored. Trust assets must be managed for your benefit during your lifetime and for your beneficiaries after your death.
If you decide to keep a joint account, put your wishes in writing regarding how the funds should be used. While not legally binding, a written document can guide your loved ones and reduce potential misunderstandings. Regularly review the account’s activity to ensure that all transactions align with agreed-upon goals. Always maintain open lines of communication to address concerns or changes in financial situations.
Although setting up a joint account can be simple, the potential ramifications are far-reaching. It’s essential to carefully consider these issues before adding someone as a co-owner. Alternative strategies like living trusts or TOD accounts may better align with your intentions while minimizing risks. Taking the time to plan now can help avoid unnecessary complications for you and your loved ones.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is a past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.littmankrooks.com.