I almost never recommend adding a non-spouse or child as a joint owner on a personal bank account or property. But, what is joint ownership, and why is it probably a bad idea for you?
(Disclaimer: I am an attorney but I am not your attorney. The information provided here is merely educational, does not create an attorney-client relationship, and should not be considered legal advice. Always consult with your own attorney about your particular circumstances.
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TALK TO A LAWYER ABOUT YOUR ESTATE PLAN, NOT YOUR COFFEE CREW
Picture this: Mom and friend play bingo every week. Grandpa and his pal have coffee every morning. And, one day, they get to chatting about their estate plans. Friends both say that they have a quick and easy way to avoid probate and make sure everything is taken care of.
Both of them heard from someone else that someone else told that other person that they should add their child, their friend, or their family member as a joint owner on their account. The friend told them that this is the right thing to do to make things simpler after death and that they didn’t need to pay an attorney to hear about it.
Readers: Don’t take legal advice from your bingo buddies or your coffee crew. Instead, go seek legal advice from a professional. Get a complete estate plan, and review your finances and accounts with your legal advisor.
What is joint ownership?
You see, I hear this all the time. Parents come to my office and tell me that I don’t need to worry about their accounts; they already added their child as joint on the account.
And, nearly every time, I counsel them to change the ownership on the account…immediately. (Whether they listen to me is another matter entirely!)
Joint ownership is not just a convenient way to transfer assets after death, it transfers your accounts during life. Joint ownership means that someone else owns your account now. Further, by default, this ownership interest is usually a joint ownership.
Legally, joint ownership means that each person has an undivided right to the whole. Each person has a right to the entire account at any time.
Now, to be fair, your mom’s/grandpa’s friend is correct that joint ownership is an easy way for your kids to have access to your accounts so that they can write checks.
Joint account ownership is a simple way to avoid probate (in most states at least). And, joint ownership is also a way for a child to take care of your finances.
However, joint ownership is also a very easy way to defeat all of your estate planning goals and even lose the entirety of the account. Furthermore, each one of those goals (convenience, avoiding probate, access in incompetence) can be achieved by a number of equally convenient and simple methods.
Adding a child/friend/family member as a joint owner is a tremendous risk. Many of my clients look at me and explain to me why their situation is different or why their child will be more responsible than others.
However, adding a joint owner is still, generally, a bad idea.
Why?
Your joint owner child can completely liquidate the account.
If you add your child/friend/family member as a joint owner, that account is also at risk of total liquidation. Anyone’s name that is on the account has full access to empty the entire account.
Just because you contributed all of the funds does not mean that your child can’t use the entirety of the funds. If you have a child who isn’t completely reliable with his or her own finances, then he or she can use your account as a slush fund with absolutely no recourse.
- If you want a real life example of how adding a joint owner can be a huge problem for your estate, check out this case: Thomas R. Fox v. Judith Ann Barker. In this case, Mr. Fox added Ms. Barker as a tenant in common on his property while they were living together. They never married.
- Years after their split, Ms. Barker sued Mr. Fox for 1/2 of his farm and won! The law was very clearly on Ms. Barker’s side. She was entitled to 1/2 of the farm regardless of the intentions of the parties at the time of creating the deed.
(To read the entire case, click here.)
Adding a non-spouse as a joint owner is an easy way to gamble with your assets.
But, before you tell me that your child is completely trustworthy and would never sue you for ownership, consider the next problem: Divorce.
Your account is now an asset of your joint owner’s Divorce
Did you know that many states in the US, including Indiana, are community property states? This means that everything that a divorcing spouse owns becomes part of the marital pool of assets.
This includes accounts that your child/friend has access to. If you add your son, brother, friend as a co-owner and then that friend gets a divorce, your account is now part of the marital assets.
I don’t think your intention was to make your account a negotiation tool of a divorce settlement, nor do you want to have to appear in court and prove that the account is actually yours.
Then, you tell me that your child’s marriage is completely stable, but can you tell me that he/she will never be a candidate for bankruptcy?
Your account becomes an asset of your joint owner’s bankruptcy
Like divorce, if your child/friend/family member is ever the subject of a bankruptcy, then your account will be part of that person’s bankruptcy estate.
If your family member has a one million dollars in debts but only $100,000 in assets, your account gets thrown into the mix in order to satisfy the outstanding debts.
Although you might be able to convince a court that the entire account is actually yours by proving the source of the funds, there are no guarantees. This is especially true if your child likes to use the funds for his or her personal slush fund (see above).
Don’t think that bankruptcy is a problem? What about accidents?
Your account can now be used to satisfy your joint owner’s liabilities or judgments.
Let’s say that your son/daughter/friend/family member gets into a terrible car crash and seriously injures another person. His or her assets become fair game to satisfy a judgment for that person’s injuries. But, remember, now you have added him or her onto your account, so, your assets are now part of the judgment too.
Or, maybe he or she was the subject of a foreclosure, a loan default, or a garnishment. That old judgment automatically attaches to your account making your account fair game for your child’s creditor.
When the creditor executes on the judgment (comes to collect), you now lose your life savings in one foul swoop simply because of joint ownership.
Still not convinced, what about your estate plan?
YOUR ACCOUNT IS NO LONGER SUBJECT TO YOUR ESTATE PLAN AT DEATH
Finally, even though your intention might be to add that joint owner as a way to avoid probate and make sure that your heirs receive your funds, joint ownership might still defeat that goal.
You see, your goal might be to divide your assets among your grandchildren and children. However, adding one joint owner leaves the entirety of that account to the single beneficiary.
And, before you tell me not to worry because you added both of your children to the account, remember my first point. Any owner can liquidate the entire account at any time. This makes it a race to the bank to get the money.
Further, that account now is not available to pay your final expenses or satisfy your specific bequests like gifts to grandchildren or charitable organizations. Your will does not govern joint accounts.
At your death, your one (maybe 2) joint owner now has 100% ownership of the entire account without any need to share it, divide it, or satisfy your debts. This account doesn’t even have to be used to pay funeral or burial costs. Although this might be acceptable to you, for most people, this does not meet their end of life goals.
WHAT SHOULD YOU DO INSTEAD OF NAMING A JOINT OWNER?
In short, I can list several reasons not to add a child/friend/family member as a joint owner on your accounts or prpoerty. Please don’t add a child or friend to your accounts without consulting with an attorney. Always consult with an attorney to learn your alternatives to joint ownership to ensure that you not only protect your assets but that you also achieve your estate planning goals.
Alternatives to joint ownership could be adding a child as a fiduciary only, transferring your assets to a trust, or even adding pay on death beneficiaries.
Your situation is unique, and state laws differ. Therefore, be sure to discuss your specific options with your counsel, but don’t take legal advice from your bridge partner!
If you want to learn more about probate, powers of attorney, or wills, click here!