Risks of joint bank accounts
Risk of debt collection, credit damageJoint bank accounts lay open to:
- Overdraft charges.
- Debt collection.
- Judgments or garnishments.
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 accountFinancial 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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