Estate Planning: Risks with Joint Bank Accounts

Making bank accounts joint with another person, particularly a spouse, is a common Estate planning tool to avoid the probate process. However, there are a number of risks and potentially unintended consequences to doing so.

A joint account is created by one person adding a second person’s name to an existing account or two people opening a new account together. A joint account is more than just a bank account with two names on it. A joint account creates a legal interest where two people have legal title to the whole balance in that account.

There are a number of good reasons to open a joint bank account. For example, they enable spouses to share control over managing financial assets and enable an adult child to assist an elderly parent with their banking. Joint bank accounts also permit money to pass outside a person’s Estate to the joint account holder, which avoids the need for those funds to go through the probate process. A bank account passes to directly to the surviving account holder by what is known as a “right of survivorship”.

A “right of survivorship” means that on the death of one joint account holder, the surviving owner takes full ownership of the account by operation of law. This means the surviving account holder automatically becomes the sole owner of the whole account. This avoids the need for the account to go through the probate process, be subject to probate tax and be distributed according to the deceased’s will.

However, there are situations where joint accounts do not always have a “right of survivorship”. In the situation where an adult child is on a joint account with an elderly parent the law presumes that the adult child holds their interest in the joint account in trust for the parent’s Estate. This is also the case where the adult child is acting as an attorney under a power of attorney document for the elderly parent they have a joint account with. The legal presumption that the account forms part of the parent’s Estate can be rebutted if the adult child can prove the parent intended the adult child to have the proceeds of the joint account as a gift.

Even though the purpose of setting up a joint account may be to take advantage of the “right of survivorship” and avoid the probate process, there are risks with having a joint bank account. If the joint account holders are not spouses and one of them is involved in a divorce, half of the joint account may be matrimonial property and subject to division in the divorce proceeding. If a joint account holder has debts, the creditors can take steps to have the joint account frozen and seize half the balance of the account to satisfy the debt. Similarly, if a joint account holder becomes bankrupt the trustee in bankruptcy is entitled to half the balance in the joint account. Finally, if the joint account is an investment account, the joint account holder has the ability to change the investments and the level of risk of the investments.

Joint bank accounts can be a useful tool in Estate planning and can permit adult children or an attorney under a power of attorney document to assist elderly persons with their finances. However, it is important to have a full understanding of the risks as well as the benefits of joint accounts before deciding if it is best for you.

For further information, please contact:
Jonathan Hooper
t: 902.405.3318
e: jhooper@pattersonlaw.ca

This article is intended for information purposes only and does not constitute legal advice or a legal opinion. If you require further information or legal advice, Patterson Law would be pleased to discuss the issues addressed in this publication.