Convenience Joint Accounts –
Titling Bank Accounts and Other Property Jointly

Article by R. Joseph Ritter, Jr. CFP® EA

As we or our loved ones age, it can become necessary for someone to help manage daily finances, pay bills and make deposits. For convenience and to have easy access to money, it is tempting to establish a joint account, and many people do just that. It is also tempting to title other property in joint names for estate planning purposes or to protect property from being seized by Medicaid.

However, this is not always the best approach. Here’s why:

1. Titling an account or property jointly is a transfer of legal title. Unless you specify otherwise, the property will likely be treated as joint tenants with right of survivorship. This means that at the passing of one account holder, the surviving account holder owns all of the money or property. Jointly held accounts and property avoid probate and do not pass under the Will or Trust. There is no obligation for the surviving owner to share the account or property with other heirs or beneficiaries.

The result can be that some family members, second spouses, companions and partners receive a greater share of the estate than was intended or receive a majority of the estate. Because the issue involves legal title, voiding the original transfer is usually required to undo joint accounts and property after one person has died. This involves litigation, which can be protracted and costly, and is successful only if it can be proven that the transfer was fraudulent, made under duress or one person was incapacitated.

The better approach is to use a Durable Power of Attorney or, if no Power of Attorney is in effect and the person is losing capacity, Court-supervised Guardianship. The Durable Power of Attorney is a very cost-efficient planning tool to ensure someone always has complete access and authority over financial matters. If you still want to title accounts or other property jointly, then review your Will to determine if any adjustments may be necessary to equalize bequests.

2. Titling accounts or other property jointly to circumvent the sale of assets to support a family member and qualifying him or her for Medicaid is not necessarily the best approach. Most government assistance programs have broad powers to look back for a period of 3 to 5 years to determine if assets were transferred. They look for transfers that were made to exempt the assets from funding care for yourself or your loved one. Medicaid and other government assistance programs commonly step in only when a person’s assets are diminished and have very strict maximum asset ownership guidelines.

This type of planning often fails and is ineffective. The time and money spent to make the transfers is wasted, and Medicaid can assess penalties because of the transfers. In other words, attempting to jointly title assets can create more headaches than it is worth.

The better approach is to seek professional guidance if you believe Medicaid or other government assistance might become necessary for you or your loved one. The money it may cost to obtain sound advice is usually less than the headaches caused by trying to do things on your own. Elder law attorneys and financial advisers qualified in Medicaid can provide the guidance you need.

3. Gift and Estate Tax issues can arise. True, most Americans do not have to worry about Federal Estate Taxes. A slightly higher number will be affected by state Inheritance Taxes. However, Gift Tax issues can be triggered by much smaller numbers. Since 2014, transfers which are subject to the Federal Gift Tax Return filing requirement begin at $14,000 per person, per donee. If your state has Gift Tax laws (and some do), you can also run afoul of gift tax issues on the state level.

Creating titles in joint names does not trigger an immediate Gift Tax liability. The theory is that as long as the parties have the unfettered right to undo the transfer by taking the money back into his or her own name, the transfer is not completed for Gift Tax purposes. Assume Jack, the father, creates a joint account with John, his son, and Jack funds the account with $25,000. John contributes nothing. After all, it is for John’s convenience in paying Jack’s bills. As long as Jack is able to withdraw the $25,000 and do with it as he pleases, a taxable gift has not been made.

The Gift Tax comes into play when Jack passes away. The gift is now complete, and the administrator of his estate has a duty to report all previously unreported taxable gifts. The amount of the gift for tax purposes will be Jack’s contributions minus John’s contributions. If the gift exceeds the exemption amount, the transfer will be reportable.

That does not mean a tax is due. Federal taxpayers are afforded a Unified Credit for Gift and Estate Tax purposes. As long as the taxpayer has credit available, it is reduced by taxable transfers. Thus, if you are expecting to have the full credit available, you have to consider that the joint account could reduce the credit by some amount.

Let’s take this scenario one step further. John predeceases Jack. Because John owns an interest in the joint account, it is reportable for Inheritance and Estate Tax purposes. Again, although the Federal Estate Tax does not come into play for many people, state Inheritance Taxes do still exist. You could unwittingly subject John’s Estate to additional Estate and Inheritance Taxes by giving him joint ownership to Jack’s account and property.

Again, the better approach is to seek the guidance of qualified tax advisers who can provide you with scenarios on the potential consequences of transfers and retitling. With Federal Gift and Estate Taxes at 40%, paying an adviser a few hundred dollars for advice is much cheaper than having to deal with an unforeseen tax bill and unexpected tax return preparation.

4. Titling your property in someone else’s name could make it available to pay their creditor claims. Continuing with the Jack and John scenario, Jack still needs access to the funds in the joint account, however, John falls on hard times and is sued by several creditors. Jointly titled property is not always subject to creditor claims, yet it is not always protected either. Transferring property to someone else while still expecting full use of the property is a plan that could quickly unravel in this scenario. The Durable Power of Attorney, Guardianship or other fiduciary arrangement avoids these issues.

Next time you consider or someone suggests transferring property or retitling property jointly, take some time to obtain advice from a well qualified advisor to set things up correctly and avoid falling into one of these traps.

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