In this blog and in an upcoming blog, I am going to cover some of the tax and allocation problems created by joint accounts. The focus of this blog is on some tax related matters involving joint accounts.

Many clients believe that joint accounts make great estate planning tools. In reality, joint accounts often complicate the estate administration, cause delay, and result in unnecessary expenses. Joint accounts limit the estate’s ability to address estate taxes, and may create obstacles for effective estate tax planning. Problems result from the limited survivorship rights associated with joint accounts. If one of the joint owners dies the account passes to the surviving joint tenant(s) unless special action is taken. Furthermore, the surviving joint tenant takes the entire account, leaving limited options for passing the account to other beneficiaries. These issues are particularly acute for joint accounts between spouses. The amount of assets held in joint accounts should be limited, particularly for married couples who can hold their assets in separate accounts.

Joint accounts often encourage the surviving spouse to take the entire account, so it cannot be used to fund a credit shelter or other estate tax saving distribution. While transferring the entire account to a surviving spouse may sound like a good idea, it complicates effective use of the deceased spouse’s estate tax credits. In New Jersey the estate tax credit is only $675,000, and if the deceased spouse’s credit is not utilized, then it is lost.

This problem is best illustrated by a hypothetical. Suppose a husband and wife place all their assets into a $1.35 million joint account at a financial institution. Since they each have a $675,000 New Jersey Estate Tax Credit, this account could pass to their children estate tax free if handled properly (including eliminating the joint title to the account). If the husband dies first, and the wife takes sole possession of the $1.35 million joint account, then the husband’s $675,000 New Jersey credit is lost. Pooling the entire account into the wife’s name resulted in the wife owning a $1,350,000 account, with only a $675,000 New Jersey estate tax credit. If the wife then dies, her estate will have to pay estate taxes on the value of the account in excess of $675,000.

There are ways to address problems caused by joint accounts, but these methods can be cumbersome and are affected by traps for the unwary. The primary method to address the issues with joint accounts is through a qualified disclaimer. A disclaimer is a written refusal to accept the ownership interest in the joint account. If drafted and filed properly, a disclaimer may allow assets in a joint account to pass under the decedent’s will or trust.

Disclaimers have limitations, and effective use of disclaimers depends on having a proper will or trust in place. One major drawback of disclaimers is the inability to direct assets. Disclaimers can only be used to refuse assets, a disclaimer cannot be used to redirect assets to a certain beneficiary. Going back to our hypothetical, if the wife disclaims the deceased husband’s 50% interest in the joint account, or $675,000, these assets pass into the husband’s probate estate. What happens to the $675,000 next depends on the terms of the husband’s Will. If there is no Will, or an improperly drafted Will, a disclaimer may not be effective.

Relying on qualified disclaimers to address joint accounts also carries substantial risks. If the surviving spouse attempts to disclaim the joint account more than nine months after death, the disclaimer will not be valid for tax purposes. Other limitations affecting disclaimers include:

  • Removing the decedent’s name from the joint account;
  • The surviving joint tenant makes transactions in the joint account; and,
  • Income or assets are distributed from the account.

Many of these actions are taken as a matter of course after a joint tenant dies without much thought as to the consequences. A surviving joint tenant could be surprised to learn that his or her ability to disclaim the account has been lost, simply by virtue of removing the decedent’s name from the account and taking certain actions on the account.

In summary, joint accounts may seem like a good idea at the time they are created, but can often lead to unfavorable results. While this blog covered some of the tax issues associated with joint accounts, there are others. To address these problems, we encourage clients, including married couples, to limit the amount of assets held in joint accounts. If a death has occurred and clients are unsure how to address assets held in a joint account, they should be encouraged to speak with their estate planning professional before undertaking any action with regard to the joint account.