Joint accounts: A convenient but potentially bad idea

Apr 20, 2021 | By: Neil Lyons

Avoiding probate is likely a lifelong goal for many of us. But for those of you who do not dream of sparing your heirs from a potentially long and expensive process, there is a way to leave money to your heirs without subjecting them to a long and arduous probate process.

Here are just a few examples of assets that are not subject to probate: 

  • Property which title passes to another at the decedent’s death by operation of law, such as homestead property, or property held in joint tenancy with rights of survivorship or in tenancy by the entireties; 
  • Assets held by the decedent in the decedent’s revocable trust; 
  • Life insurance proceeds payable to a named beneficiary other than the decedent’s estate; 
  • Certain wages, travel expenses, or re-employment assistance, or unemployment compensation due to the decedent at death and payable directly to the decedent’s surviving family members. 

What can I do to avoid probate?

Joint bank accounts, beneficiary designations, and the like are what I like to call probate avoidance tools.  

Joint bank accounts will pass to the survivor upon the joint owner’s death without the need for any court administration. In addition, a joint account holder can use the account to pay your bills in the event you become incapacitated. 

With these upsides, however, come a few potential downsides.

Potential pitfalls of naming a joint account owner

For example, by naming a joint owner, you have also given that person ownership of the funds in that account. That means a joint account owner could expose the funds in that account to the joint owner’s creditors.

It’s critical to — at least somewhat — be wary of joint accounts.

In addition, joint account owners can withdraw funds from a joint account, at any time, without the consent of the other account owner. This means they can drain the entirety of your account without your permission and sometimes without you even knowing it happened. The lesson in this scenario is before choosing to appoint a joint account owner, choose wisely.

You may remember a previous post where I discussed choosing an agent to control your finances. Well, the situation is similar with joint accounts.

Before naming someone as a joint account holder, consider asking the candidate a few questions like: Do you have issues with substance abuse? Do you owe an unreasonable amount of money to credit card companies? Are there any outstanding warrants for your arrest?

The point, if it isn’t already obvious, is to be careful who you name as a joint account holder. It’s a useful tool to avoid probate but can cause problems for the unwary.