Joint Bank Accounts: How They Work & How To Open One
A joint account is a type of bank account that allows more than one person to own and manage it. There is no restriction regarding who can be an owner, which can include spouses, friends and business partners, among others. Everyone named on the account has equal access to funds, regardless of who deposited the money.
Joint bank accounts aren’t for everyone, and the rules for how your money is handled in the event of death or divorce vary depending on the type of joint account you open and your state’s laws. Below, we discuss the various factors to consider when opening a joint account, along with a comparison of its different forms, instructions for opening an account and advice on how to manage it well.
Pros And Cons Of A Joint Bank Account
Consumers merge their finances for different reasons. Whatever yours may be, understand that you will share the responsibility of managing the account — as well as its risks and conveniences. For this reason, WalletHub recommends opening a joint bank account only with someone you completely trust such as a spouse with whom you share financial goals and commitments. Joint accounts are generally a bad fit for short-term partnerships or other relationships that aren’t part of a common household.
In the following table, we summarize the biggest benefits and drawbacks of owning a joint bank account:
|Equal Ownership: Any owner can draw or deposit funds without the involvement or consent of the other owners.||Joint Liability: Everyone is liable if one owner mismanages the account (e.g., overdrafts), and everyone may be reported to ChexSystems.|
|Additional Deposit Insurance: FDIC and NCUA provide $250,000 of federally backed insurance coverage per depositor, per institution in case of bank failure. This means a joint account with two owners enjoys up to $500,000 of deposit insurance, compared to $250,000 for an individual account.||No Individual Protection: Legal action may be necessary to recover funds if one owner depletes the entire balance and closes the account.|
|Simplified Finances: Paying shared expenses out of one account can make budgeting and paying household bills easier.||Limited Asset Protection: Depending on your account terms, a creditor can collect against the joint account to satisfy the debt of one owner, regardless of who deposited the money|
|Strict Account Closure Rules: Any owner can close the account but cannot remove another owner without that person's permission.||Gift Tax Issues: Any amount exceeding $14,000/year that is withdrawn by an added co-owner (other than your spouse) may be treated as a gift by the IRS (also applies if you add a co-owner before death, which may subject you to estate tax).|
|—||Divorce Issues: If you split up with your spouse, you’ll continue to share the account until it's closed. The spouse of your co-owner going through divorce may also be entitled to funds in the account, regardless of who deposited the money.|
|—||Reduced Benefits Eligibility: Adding a college student as a co-owner inflates his/her assets and reduces his/her eligibility for financial aid; the same is true for Medicaid long-term care eligibility of an elderly co-owner.|
Right Of Survivorship
One distinct feature of a joint bank account that is not common among other account types is a “right of survivorship,” which is an option on all standard joint bank account forms. A right of survivorship stipulates that if one owner dies, 100% of the remaining balance passes to the surviving owner. This can be both a blessing and a curse, and here’s why:
- Benefit: If your joint bank account carries a right of survivorship, the account bypasses probate in the event of an owner’s death. Because probate can be a costly and time-consuming procedure, a joint bank account with a right of survivorship can help make sure funds are available to pay bills without delay after one party’s death.
- Risk: If your account carries a right of survivorship and you die, your account will not be included in your estate and therefore will not honor any instructions in your will, if you have one. This can be an unintended consequence if you meant to leave your money to your heirs, not to your co-owner.
However, there are several types of joint bank accounts (see next section) that do not have a right of survivorship or for which you can opt out of this option. Some circumstances can also dissolve a joint account’s survivorship status and the assets become subject to a will, depending on your state’s statute. We recommend consulting an experienced estate-planning attorney if you want to learn more about these special cases.
Types Of Joint Bank Accounts & How To Open One
You and other people can share most types of bank accounts such as checking, savings or Certificates of Deposit (CDs). But each of those can be broken down into several subtypes that dictate how funds are handled in death and divorce or other special circumstances such as incapacitation.
The table below compares the subtypes of joint accounts according to their most common users, features and limitations. Once you’ve selected the best option for your needs, you can follow WalletHub’s instructions for opening a bank account, whether online or at a physical branch.
|Joint Bank Account Subtype||User||Division Of Ownership/ Responsibility||Right Of Survivorship||Subject To Probate (upon death of an owner)||Asset Protection|
|Joint Tenants With Rights Of Survivorship Account (most common)||Couples, married or otherwise, but available to anyone||Equal/Equal||100% of balance passes to surviving owner||NO||Creditors allowed to collect against account, regardless of who deposited funds|
|Joint Tenants In Common Account||Business partners and domestic partners, but available to anyone||(Un)equal/
|Decedent's share of balance passes to estate then distributed according to will or trust||YES
If decedent has no will or trust, account passes through intestate succession (process of distributing account funds to closest relative(s))
|Creditors allowed to collect against account, regardless of who deposited funds|
|Tenants By The Entirety Account||Married couples, domestic partners and members of a civil union only||Equal/
Equal (All parties also required to sign off on every transaction)
|100% of balance passes to surviving owner||NO||Creditors allowed to collect only on assets acquired together by couple and only with permission of both owners|
|Convenience Account||Elderly/incapacitated persons requiring assistance of "agent" to act on behalf of owner, but available to anyone||Owner/Agent||Depends on owner's wishes but generally no||YES, unless owner specifically declined "Right of Survivorship" on account application||Creditors allowed to collect against account unless you can prove your agent does not have ownership over funds|
|Joint Payable-On-Death (POD)/
In-Trust-For (ITF) Account
|Consumers who name a beneficiary other than surviving owner||Equal/Equal||100% of balance passes to surviving owner (then to named beneficiary upon death of all owners)||NO||Creditors allowed to collect against account, regardless of who deposited funds|
Tips For Protecting Your Joint Bank Account
Joint bank accounts are convenient, but their shared nature sometimes complicates the process of managing them. By following the tips below, you can avoid potential problems.
- Use The Account For Shared Expenses: Budget enough for regular bills and expenses you share with your co-owner, and keep that amount in the joint account. Don’t use your joint bank account for all your financial needs, and avoid using it for personal spending. You may consider also opening separate individual accounts at the same bank for that purpose.
- Let One Person Balance The Checkbook: With too many hands in one pot, trouble is bound to befall your account. Balancing should be the responsibility of only one of the account owners — the one handling the bills. You can opt to alternate this responsibility, but it’s best for only one person to manage the account at any given time.
- Commit To Honesty & Transparency: The success of a joint bank account relies on trust among all of its owners. Everyone needs to inform the other owners, especially the designated account handler, when money is moving in or out of the account before it happens.
- Open The Right Type Of Account: If you intend to leave your money to someone other than your co-owner upon your death, name that person as a beneficiary on a payable-on-death (POD) account. Keep in mind that there are other options besides joint accounts that may suit your needs better. If you need help with banking activities, for example, you can get a “durable power of attorney” that maintains your ownership of the funds and limits your “agent’s” access to your account to certain circumstances (e.g., incapacitation). Special accounts called Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are designed specifically for minor children. With these accounts, you can save money on behalf of your child as a custodian until he or she reaches age 18.
Image: hidesy / Shutterstock
Was this article helpful?