Risks of joint bank accounts

Risk of debt collection, credit damage

Joint bank accounts lay open to:

• Overdraft charges.
• Debt collection.
• Liens.
• Judgments or garnishments.
• Divorces.

Even in cases where joint account holders are not married (or perhaps not even related), what happens in one person's life can affect the other's financial stash.

Here are a few examples:

• An elderly parent puts an adult child as a co-account owner. If that adult child gets divorced, the account can be considered part of the adult child's assets, even though the implicit understanding is that it's the parent's money.
• A grandparent opens a joint bank account with a grandchild to save for college, but sometime later, the grandparent faces a lawsuit or goes bankrupt.
• Either party uses the account as collateral for a loan, then defaults.

"In most cases, if it's with a child or an elderly relative or maybe a casual business associate, we think there are much better ways to structure your assets than just to have a joint bank account with those people," says Sullivan.

How to protect your joint account

Financial advisers suggest you can do a few things to make the account a bit safer.

• Keep minimal amounts of money in joint bank accounts for day-to-day use.
• While they are more common with commercial accounts, set up criteria for account transactions requiring two signatures through the bank.
• Use online banking alerts to monitor account activity.

The motivation for joint bank accounts is often rooted in "wanting to take care" of someone -- just in case. But, you can do essentially the same thing in other ways.

• For spouses or other people you want as direct beneficiaries: Set up the accounts to "pay on death."
• For elderly parents, spouses or family members: Set up durable powers of attorney, which give access to accounts in certain circumstances (illness, incapacitation, etc.).
• For minor children: Set up accounts in trust or UTMA -- Uniform Transfer to Minors Act -- where you can serve as custodian, but the money is legally the child's.

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