A joint account is one way to leave funds to your family after you pass away. This type of account can usually avoid probate. Beware, however, there are some downsides to using a joint account to pass on an inheritance.
How
If you have a joint account “with rights of survivorship” when you pass away, the other owners of your account will receive all funds. Full ownership of the account can be achieved outside of probate, since the remaining account holder needs only to produce a death certificate to give to the financial institution.
Disadvantages
There are five potential pitfalls your joint account could face during the estate settlement process. First, if other owners on the account have not contributed funds when establishing the account or purchasing the asset, the monies could be seen as a gift. If the gift exceeds the annual gift exclusion amount – now $13,000 per person – it must be reported to the IRS.
Your joint account may also disinherit some heirs. If the asset is styled as joint tenancy with survivorship, only those joint tenants listed on the account receive the balance. Any family members not listed on the account will not receive any of those funds, even if you wished to include them. If those listed as joint tenant survivors choose to share funds with those not listed, they must be aware of gift tax reporting requirement if the “gift back” to others exceeds the annual gift exclusion..
Once you add another person to an account or put their names on the title of property, those assets are at risk. If your joint owner has a creditor judgment, a lien may be placed upon your account or on the title to your property. You will either have to pay the lien or forfeit some or all of those funds.
Next, if you add someone to the deed to your real estate as a joint tenant, you must get them to agree to any transfer or sale of that property. Worse, if the joint tenant is married, their spouse must also approve the sale or transfer in most states. If that joint tenant is going through a divorce or is facing other issues, this could delay closing, even cause you to lose the sale.
Finally, if you share an account with a minor, he or she cannot inherit the account until adulthood. In the meantime, a court-supervised guardian will have control of those funds for your child’s benefit. A guardianship may rob your children of some of their inheritance for legal fees.
A far superior alternative is to consider using a revocable trust. When created and used properly, you will avoid many of these problems.
Larry Parman
Attorney at Law
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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