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Is a Joint Bank Account A Good Idea for You?

Is a Joint Bank Account A Good Idea for You?

Joining forces can be a good strategy, whether it’s two companies or two people with common goals. For sure, there are advantages of co-mingling funds in a joint bank account, but there are also risks.

To make your duo savings effort dynamic instead of disastrous, there are some key considerations.

Understand the lingo

There are different types of joint accounts. Decide what’s best for you. Three common ones are joint with right to survivorship, tenants in common and tenants by entirety.

If that’s foreign to you, here’s what it means. Joint tenancy with right to survivorship implies that if you become incapacitated, the other account owner can still access the account. If you die, the account passes directly to the other tenant, bypassing probate, explains Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group.

When you open a tenancy in common account, each partner owns a separate share of the account, and the share can be unequal. If one tenant dies, their share can be passed to someone else outside of the account through a will or probate. "This can be risky because it implies you could end up sharing an account with someone you don’t know," she says.

On the other hand, tenants by entirety is an option specifically for spouses, offered in some, but not all states. This titling allows spouses to own the account as a single legal unit, implying creditors may not go after one interest in the property, unless they are creditors of both spouses. "If your spouse dies, the account is passed directly to the surviving spouse without probate," says Kibler.

Two are better than one

Joint bank accounts can work as a great substitute for cumbersome probate proceedings in certain circumstances. Say a bank account is held jointly by a grandmother and granddaughter. If grandma wants her granddaughter to get the funds in her bank account when she passes and the account is owned jointly, the granddaughter will have access to the funds immediately, and she will have ownership of the account by operation of law, says Thomas Groth, a tax attorney.

Joint bank accounts can work as a great substitute for cumbersome probate proceedings in certain circumstances.

Another advantage of a joint account is that it can simplify bill paying by using just the one account. "It prevents the hassle of a ‘reimbursement’ process which can be cumbersome," says Bradley Roth, a certified financial planner with Kattan-Ferretti Financial, who recently married. "For us, we have a better understanding of our cash flow position when we can view all of our cash in a consolidated manner. We know when bills are due, what our projected month-end balance will be and how much we should be able to investment/savings accounts."

In this age when financial infidelity is common, there’s something to be said for visibility and transparency. "You both have an overall picture of your finances," says Cynthia Pruemm, owner of Senior Insurance Solutions.

Then too, larger balances will generally mean lower fees assessed by the bank, points out Ben Barzideh, wealth advisor at Piershale Financial Group.

Some feel there’s no debate about spouses having joint accounts. "Married with separate checking accounts is another example of something that makes no sense. If you have decided to get married, you have by definition decided to combine your emotional, spiritual; and financial lives, so act like it," says Liz Recchia, owner of We Sell Real Estate. "If you’re unmarried, don’t act married. Act like the business partnership you are, complete with a written partnership agreement."

Joint accounts can also be a jumble

Just take taxes for example. Taxation of joint bank accounts are incredibly complex, says Jamie Hopkins, professor of taxation at The American College.

However, there are certain principles to abide by when determining who owes taxes on a joint bank account. First, he says, allocation of federal income tax liability is generally controlled by a rule that causes each co-owner of property to pay the portion of taxes attributable to the income that he or she is entitled to under law. "This typically means that if joint bank account owners have equal access to the account they should pay their portion of the taxes on interest," he says.

in some cases, if only one's person social security number is tied to the account, the other co-owner won't get a 1099-INT notice from the bank and therefore won't be aware of the taxes they owe

But in some cases, if only one's person social security number is tied to the account, the other co-owner won't get a 1099-INT notice from the bank and therefore won't be aware of the taxes they owe. In some cases, the taxpayer receiving the 1099-INT will report it, but still show a deduction for interest paid to the other joint account holder.

"Beware of foreign owned joint bank accounts as the rules get even trickier, as both account owners could end up owing taxes in multiple jurisdictions," says Hopkins.

However, if one of the joint bank account parties is an agent of the other owner, the agent will not be deemed to own the account. As such, the agent would be treated as just holding title for the benefit of the other owner and would have no tax liability.

Groth says he has seen joint accounts completely wiped out by government levies, both when he worked as a personal banker and as a tax attorney. "When I worked at a bank, a girlfriend had added her boyfriend to her account so that he could pay bills from the account, but it was her paycheck that was directly deposited into the account every week. The entire account was seized for back child-support and there was nothing that we, the bank, could do about it."

There are other things that should make you think long and hard before opening a joint account. "No one can stop a joint account owner from withdrawing all funds," says Brent Adams, executive vice president and senior banking officer at the Private bank of Buckhead. "An account is at risk from creditors or liens against either owner."

The motivation for joint bank accounts is often rooted in wanting to take care of someone, but Adams point to alternatives. For spouses or other people you want as direct beneficiaries, set up the accounts to pay on death. For elderly parents, spouses or family members, set up durable powers of attorney, which give access to accounts in certain circumstances like illness or incapacitation, and for minor children, set up accounts in trust or UTMA (Uniform Transfer to Minor Act). You can serve as custodian, but the money is legally the child’s.

If you receive an inheritance and place it in a joint account with your spouse and your spouse gets sued, the money would be up for grabs in the lawsuit, explains Adam Dawson, author of Timeless Principles of Financial Security.

It’s no small matter either, says Howard Dvorkin, CPA and author of Credit Hell, that, "Individuals lose the freedom to manage their own money and both people have to rely on each other be financially responsible."

Adams offers a few pieces of advice, "Keep minimal amounts of money in joint accounts for day-to-day use. While they are more common with commercial accounts, set up criteria for account transactions requiring two signatures through the bank. Use online banking alerts to monitor account activity."

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