Does a Joint Account Become Part of an Estate?

A joint account can be a convenient way to share financial responsibilities with a partner or family member, but it can also raise questions about what happens to the account when one of the account holders passes away.

In most cases, a joint account does not become part of the estate of the deceased account holder. This is because joint accounts are typically held with a right of survivorship, meaning that the remaining account holder(s) automatically inherit the funds in the account upon the death of the other account holder.

The right of survivorship can be a benefit for joint account holders, as it allows the remaining account holder(s) to avoid going through probate and can help to simplify the process of transferring assets after a death.

Joint accounts can be a convenient way to share funds, but what happens to them in an estate? A joint account can avoid probate, meaning the surviving tenant automatically inherits the funds without delay. However, this doesn't mean it's completely exempt from estate taxes.

If the surviving joint owner is not a spouse, the fair market value of the entire account will be included in the decedent's estate, but if the surviving joint owner is the surviving spouse, only 50% of the fair market value is included. Estate taxes can be a significant concern for large estates, but only those worth more than $13.61 million in 2024 are subject to federal estate taxes.

A joint account can be set up with rights of survivorship, which means the assets are transferred to the surviving account holder upon the death of one account holder. However, if the account was set up with the owners as tenants in common, the deceased owner's share of the account will be subject to probate.

Here's a summary of what happens to joint accounts in an estate:

It's essential to consider these factors when setting up a joint account, especially if you're planning to avoid probate or minimize estate taxes.

A joint account can be a great tool for avoiding probate, allowing the surviving tenant to inherit the funds without delay. This can be especially beneficial for spouses who routinely commingle and share their money.

Joint accounts can also help avoid adult guardianship in certain circumstances, such as if one of the owners can no longer make financial decisions for themselves.

However, there are some potential drawbacks to consider. A joint account may be subject to estate taxes, depending on the state you live in and the value of the account.

Additionally, a joint account can be vulnerable to lawsuits, where the funds may be collected as damages if one of the owners is sued. This can be a risk to consider when deciding whether to open a joint account.

Here are some of the potential disadvantages of joint bank accounts:

Joint accounts can avoid probate, allowing the surviving tenant to inherit the funds without delay, although some banks may require a few extra steps.

Having a joint account can be a great option for spouses who commingle and share their money.

Joint accounts can also help avoid adult guardianship in certain circumstances, such as if one owner can no longer make financial decisions due to dementia or an accident.

The account can be used to avoid the need for a guardian, providing a smoother transition for the other owner.

Many people use joint accounts to simplify their finances and make it easier to manage their money together.

Joint bank accounts may not be the best option for everyone. One of the biggest disadvantages is that they may be subject to estate taxes, depending on the state you live in.

Estate taxes can be a significant burden on the remaining account holders. If the total value of the gross estate of the deceased owner is above federal or state exemptions, the joint bank account may be subject to both federal and state estate taxes.

You have no control over withdrawals from a joint bank account. One owner alone cannot control any withdrawals from the account.

This lack of control can lead to problems if one of the other account holders gets sued and the funds are collected as damages. Lawsuits can be unpredictable, and you may end up losing access to your own money.

If you have a joint bank account with just one person, only that person will inherit the account when you pass away. This means that your other beneficiaries may not receive the inheritance you intended for them.

Income tax consequences can be a complex issue for joint account holders. Most people understand that taking full ownership of a joint account entails taking on the income tax burden for the account.

For joint account holders, income tax responsibilities kick in from the day the account is transferred. This means the joint owner is responsible for paying taxes on any income generated by the account.

If a joint account holder passes away, the income tax burden can be tricky to navigate. The decedent's income tax obligations should be itemized during the probate process.

Income generated by the account for the first half of the year will need to be included in the decedent's final tax return. This can be a surprise for many people, so it's essential to understand the tax implications.

For example, if an individual passes away on July 1 and a joint brokerage account transfers into the joint owner's name, income generated by the account after July 1 will be reported on the joint owner's income tax return for the same year.

It's crucial to consult with a tax professional to evaluate any potential income tax burdens before liquidating any assets from the joint account.

Alternatives to joint accounts exist, such as Financial Power of Attorney and Living Trusts.

Financial Power of Attorney allows someone to take control of your finances if you're unable to do so yourself.

A Living Trust, on the other hand, has a trustee manage your bank account's assets for the benefit of your beneficiaries, avoiding probate.

Joint accounts have their advantages, including avoiding probate and adult guardianship in certain circumstances.

For spouses who commingle and share their money, a joint account is often a suitable option.

Joint accounts can be a great tool to avoid probate, allowing the surviving tenant to inherit the funds without delay, but it's essential to consider the consequences.

Avoiding adult guardianship is another advantage of joint accounts, as they can sometimes be used to bypass the need for a guardian if one of the owners can no longer make financial decisions.

Joint accounts can also have unintended consequences, such as disinheriting beneficiaries if not set up correctly.

If an aging parent adds an adult child to their account as a joint owner without listing other heirs, only the joint owner can take over the account at the time of death.

To prevent this from happening, it's crucial to list all the heirs on the account as transfer-on-death (TOD) or payable-on-death (POD) beneficiaries.

Most financial institutions also allow you to list contingent beneficiaries in case the primary beneficiaries die before the account owner.

In some cases, the joint owner may be subject to gift tax limitations if they agree to liquidate the account and disperse the funds between the heirs indicated in the will.

Alternatives to Bank Accounts can be just as effective as joint accounts in managing finances.

Setting up a joint account with a child who is acting as a caregiver can lead to unintended consequences.

One alternative is to execute a power of attorney to allow the child to access accounts.

You can also name both children as beneficiaries on the account to avoid probate.

Another option is to set up a lifetime revocable trust to manage assets in the account.

Financial Power of Attorney allows someone to take control of your finances if you're unable to do so.

This can be a good alternative to joint bank accounts.

By putting your bank account in a Living Trust, a trustee manages the assets for the benefit of your beneficiaries.

This option also avoids the probate process.

Estate Tax Consequences can be a complex and overwhelming topic, but let's break it down in simple terms.

If the surviving joint owner is not a spouse, the fair market value of the entire account will be included in the decedent's estate, which can lead to significant tax implications.

In most cases, the decedent's will should determine how any applicable estate taxes are paid for, but it's common practice to use a life insurance death benefit to cover liabilities like estate taxes, funeral costs, and more.

If the decedent did not leave a will, the state will determine if funds from the joint account are required to pay an estate tax obligation.

Here's a summary of the estate tax consequences:

It's worth noting that only very large estates are subject to estate taxes at the federal level, those worth more than $13.61 million in 2024, and only the value over that amount is subject to the tax.

If you're a joint account holder, you may be surprised to learn that you're not automatically responsible for the decedent's debt. In fact, creditors will make claims against the decedent's estate through the probate process. This means you won't be held liable for the debt unless you're a surviving spouse or cosigned for it.

Joint bank accounts can also make you vulnerable to lawsuits. If one of the other owners gets sued, your funds may be collected as damages. This highlights the importance of understanding the potential risks involved with joint accounts.

Here are some potential risks to consider:

A joint bank account can be vulnerable to litigation, even if it's not officially designated as a convenience account.

If a joint bank account is not designated as a convenience account with the bank, there's a legal presumption that it wasn't intended to be one.

In the case of Matter of Camarda, the court established that the burden of rebutting this presumption is on the challenger, who must provide direct proof or substantial circumstantial proof to support an inference that the joint account was opened for convenience.

This can be a challenge, as the challenger must demonstrate clear and convincing evidence of the depositor's intent, or prove undue influence, fraud, or lack of capacity.

To avoid potential issues, it's essential to clearly communicate your intentions to the bank and the other account holders.

Here are some possible ways to establish a convenience account:

Keep in mind that the specific requirements may vary depending on the jurisdiction and the circumstances of the case.

Asset freezing on death is a common concern, but fortunately, it's not typically an issue with joint bank accounts. Joint accounts are usually set up as "Joint With Rights of Survivorship" (JWORS), which means the assets are transferred to the surviving account holder upon death.

This is a significant advantage of joint accounts, as it avoids probate and ensures the surviving tenant inherits the funds without delay. Some banks may require the surviving tenant to jump through a few hoops before releasing the funds, but this is not a standard practice.

In fact, the Federal Deposit Insurance Commission (FDIC) states that joint accounts are exempt from probate, as long as they are set up as JWORS. This can save a lot of time and money for the surviving family members.

Here's a quick rundown of how joint bank accounts work when it comes to asset freezing on death:

It's worth noting that not all joint accounts are created equal, and some may have specific rules or restrictions that affect asset transfer. It's always a good idea to check with the financial institution to confirm how their joint accounts work in the event of a death.