Convenience is an oft-cited reason for opening a joint chequing, savings or investment account. A joint chequing account makes it easy for spouses to pay shared household expenses. Signing on as co-owner of the accounts of an elderly parent is a handy way for a time-pressed adult child to monitor and manage her parents' financial affairs.
However, there are other, arguably more important, factors to consider before setting up a joint account with a family member or a trusted friend or advisor. Without full consideration of how these accounts work, the resulting consequences for your finances and your estate could be devastating.By definition, a joint account is a bank, investment or other account that is owned equally by two or more people. When the account is opened, the accountholders specify whether transactions require joint or individual consent.
The standard joint account has two partners who can each deposit, withdraw or otherwise manage the funds in the account without the consent of the other, no matter who contributed the funds. Each co-owner has equal responsibility for the account assets and liabilities. It can be legally difficult for one owner to recoup money improperly withdrawn by the other.
When one partner dies, depending on how the account was set up, the funds either automatically pass to the other, or are split between the survivor and the estate of the deceased.
Before opening a joint account, partners must have a frank and thorough conversation about their personal finances. The discussion should include each partner's income, assets, liabilities, spending patterns and money-management style as well as family finances and financial plans.
This is the time to set account operating parameters. Is the account for joint household bills only or for all expenses? What are each person's responsibilities? How much money will each partner contribute? Who pays which bills?
This is also the time for both partners to commit to ongoing communication about and periodic review of the joint account. Before the conversation ends, the partners should ensure that they both understand the joint account structure and its obligations.
"With joint accounts, one person typically takes the driver's seat and the other is the passenger in terms of account activity and management," says Linda MacKay, senior vice-president, retail savings and investing at TD Bank. "However, no matter who does what, both accountholders are equally responsible, so they should both pay attention to what is going on in the account."
Joint accounts are convenient and can reduce the time spent divvying up shared expenses. If the partners opt for one chequing account, banking fees will usually be lower. Canada Deposit Insurance Corp. coverage limits could be higher since jointly held deposits are insured separately from deposits held individually.
Some families opt for a joint account for estate-planning reasons. These accounts are not considered part of the estate, and thus avoid probate and its associated fees. The surviving partner has immediate access to the funds which might be needed to cover living expenses.
However, the inopportune sale of estate assets could be required to cover taxes and other expenses, if much of the deceased's cash was in a jointly held account(s) and thus not part of the estate.
The transactions in a joint account are open to scrutiny by all co-accountholders. Spending on secret indulgences is not hidden from your partner. Nonetheless, this lack of privacy could be a good thing for the family budget as it acts as a brake on excess spending.
If your co-accountholder runs up debt and creditors come calling, up to half of the funds in the account may be seized to satisfy the debt.
When partners split up, a joint account should be closed promptly to alleviate the inevitable money issues. If one partner cleans out the funds before the account closure, the other could suffer a cash-flow crisis and require lengthy and costly matrimonial-property negotiations to recover her fair share.
An inter-generational joint account usually involves adding an adult child as an account holder of an elderly parent's existing account in order to take care of the parents' finances and/or avoid probate fees. This account structure does not suit all family circumstances.
Changing account ownership could force the parent to declare unrealized capital gains in the account and pay a hefty tax bill.
Because the child as co-owner can use the account funds as she sees fit, elder financial abuse is a possibility. As well, the child's creditors may be able to access some of the parent's funds to satisfy debts.
Probate fees depend on the province of residence, and the savings could be insignificant compared to the costs arising from changing the account structure. (See Death is no escape from taxes for a province-by-province run down on probate fees.)
Until recently, when a parent died, a child who was a co-accountholder would automatically inherit all the funds (unless written instructions indicated otherwise). In some families, this caused feuding over who was entitled to the money and delayed settlement of the estate.
Two Supreme Court decisions in 2007, Pecore vs. Pecore and Saylor vs. Madsen, clarified the situation. Now, when a parent dies, the money in an inter-generational joint account is held in trust for the parent's estate. The child does not own the funds unless, when the account was set up, the parent indicated as such in writing.
"The purpose of a joint account is to convey ownership of the funds, not to convey access," says Lynne Butler, a wills and estates consultant who blogs at Estate Law Canada. "If access to the account to assist with finances is the intent, a power of attorney specific to the account is a better solution. It should be available at the financial institution where the account is held."
