Holding a joint account can make a lot of financial sense in certain situations. Although joint bank accounts carry with them some potential for misuse, the convenience and benefits they offer generally far outweigh the risks.
In recent times, they’ve also been promoted as an attractive way to minimize probate proceedings after the death of one of the joint account owners—but are they as useful as they’re made out to be? What’s payable on death? Are there any complications which could affect what happens to the account?
As with any matters involving New York probate law, an overabundance of caution is always advisable. In this article, we’ll explain the common uses for joint accounts, what will happen to them upon death, and what ramifications they have on probate proceedings.
What Are Joint Accounts?
At its simplest, a joint account is a bank account held by two people, who then have the same rights of access to the funds. Permission isn’t required by the other party to make transfers out of the account, regardless of who deposited the money there in the first place.
This type of account can be useful in a number of scenarios:
- As a secondary account that children or other relatives can draw on
- As proof of a de facto (common law) relationship for immigration or visa purposes
- For sharing of funds between you and your spouse
- To help manage the financial obligations of an elderly or infirm relative
- To provide easy access to funds if one account holder becomes incapacitated
Convenience Versus Right of Survivorship
The most important distinction to note between types of joints accounts is whether it’s a “convenience” account or an account with “right of survivorship.” This is generally determined when the account is first created, and the vast majority of accounts fall into the latter category.
Sometimes this is indicated by the acronym WROS (With Right Of Survivorship) or JTWROS (Joint Tenants With Right Of Survivorship) in the account title. If it isn’t, you’ll need to ask your bank to find out what type your joint account is.
Who Will Inherit the Account
When a joint account holder becomes incapacitated or unable to withdraw funds for any reason, the other account holder can typically use the bank account just as they did before. The same is true if the joint owner dies, but only if the account is one with “right of survivorship.”
In this case, the joint account is not subject to probate proceedings and is not considered part of the deceased’s estate. Since it’s not part of their estate and, therefore, no longer their property, then it also means that it can’t be bequeathed or otherwise transferred as part of the execution of a will. The sole owner can also then close a joint bank account after death.
On the other hand, if the bank account is specifically marked as a “convenience” account, the other owner will no longer have access to the funds when one owner dies. Instead, the entire account and any contained funds will be treated as the deceased’s assets and, thus, part of their estate, subject to the probate of the will.
Paying Off Debts
Outstanding debts are settled as part of the distribution of the deceased’s estate. This means that if the joint account passes on to the surviving owner, and it doesn’t become part of the estate, then it can’t be used to pay off creditors. If it’s an account of convenience, then the remaining funds will be added to the estate and, therefore, will be liable to be used for debt settlement.
The one exception to this is if both the deceased and the co-tenant of the joint account were also co-signatories on a loan. In this case, the surviving owner of the joint account will be held liable for any remainder of the debt that cannot be paid off by the estate.
Assuming the joint account is one with right of survivorship, as most are, then it will not attract a probate tax. However, there are three other separate taxes that the account will have a bearing on.
The estate tax is a federal tax on the entirety of the deceased’s estate, also known as a gross estate. The gross estate includes both probate assets (those handled by a will) and non-probate assets (those not controlled by a will, such as jointly owned properties and life insurance payouts).
As a non-probate asset, joint bank accounts on death are subject to estate taxes. There are estate taxes on both the federal and state level, although the exact rate varies from state to state.
Inheritance tax differs from estate tax in that it is a levy not on the entire estate, but on individual property or assets passed on to inheritors. While the estate tax is paid out of the deceased’s estate, the inheritance tax is paid by each individual on their share of the inherited property.
In theory, this would also apply to the person who gains sole possession of a joint account. In practice, this tax is currently only applicable in six states: Nebraska, Iowa, Kentucky, Pennsylvania, Maryland, and New Jersey. The tax rate also depends on the proximity of the relationship of the inheritor to the deceased—a spouse, for example, often pays no tax.
In most cases, income tax will be negligible on a standard checking or savings account. However, if it’s a joint investment account with high returns, you’ll need to be careful with how you report any income generated.
The income generated before the death of the joint account tenant must be reported in the same way that it was in prior years. So, if both account holders reported 50% of the income each on their tax return, the same would be done on the deceased’s final tax return.
As soon as the joint account transfers to a single owner, however, that owner is then responsible for reporting the entirety of the income on their own income tax return.
The execution of a will can be a complicated, emotional affair, especially if not every document and asset has been managed properly. That’s why it’s vital to find out what kind of joint account you hold and to thoroughly document your intentions for the account before anything happens.
All it takes is one missed detail. Consider an example where a single family member is using a joint bank account to pay their elderly parent’s bills. They may inadvertently end up with all the money when something happens, causing friction with family members and others who feel entitled to their fair share. In the worst case scenario, it can result in lengthy and costly litigation brought about by the aggrieved parties.
Leave a Legacy, Not Confusion
Don’t leave a valuable estate open to interpretation. Hire a professional and meticulous estate planner that can take full care of you and your family. With over 20 years of experience, Queens probate lawyer Joseph A. Ledwidge PC can help executors, beneficiaries, estate holders, and trustees with a wide range of estate and probate matters.
Across New York, we deliver clients the outcomes they need at rates they can afford. Call (718) 276-6656 to find out how we can help you, too.
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