Wednesday, 25 November 2020

How a Joint Bank Account Works — And Why You Might Want One

How a Joint Bank Account Works — And Why You Might Want One
01 Nov
10:09

What is a joint bank account?

A joint bank account is an account owned by two or more people allowing each of the owners to make deposits, withdrawals and other decisions. This could help make it easier to manage shared bills, meet a bank’s minimum account balance requirement, qualify for a higher interest rate or help reach a joint savings goal.

You don’t have to be married or even related to have a joint account depending on the type of account you choose. In this story, we’ll explain all the different types of joint bank account options you have, the rules you should know about and how to choose the right account for your needs.

Types of joint bank accounts

In most cases when you open a joint account you will have to select the subtype, which some banks may refer to as “titling.” A subtype dictates how the account will be handled when an owner dies, gets divorced or can’t make decisions on their own.

Many of the joint account types work similarly in that each owner has equal access to the funds. The key differentiator is what happens when one of the account owners dies — most importantly, and whether or not the funds avoid the probate process. Probate is the legal process of winding up a person’s estate after his or her death, said Atlanta-based attorney, Sydnee Mack, Esq.

Probate can be a lengthy and costly process, and one that most people try to avoid. According to the American Bar Association, the probate process could take six to nine months to settle, with larger more complex estates taking longer.

Below are some of the subtypes you may run into, what they mean and the differences between them:

Joint Tenants with Right of Survivorship (JTWROS)

This account can be opened for two or more people and is the most common joint account option. Most banks, credit unions and even investment firms offer this option. Usually the account holders are married but this is not a requirement to open or maintain this type of account. This option is also common for adults taking care of their aging parents. When an account holder dies, the remaining portions pass on to the other account owner(s) and do not go to probate.

Joint Tenants in Common (JTIC)

Similar to JTWROS, the joint tenants in common account option gives multiple users equal to access to the account. The key difference here is what happens when one of the account owners die. Instead of the account automatically being split among the other owners, the deceased account owner’s portion will go to their estate and could be subject to the probate process.

If you’re looking to avoid any estate and probate issues, you could add a payable-on-death option. This will allow the funds to avoid probate and go directly to named beneficiaries.

Tenants by the Entirety (TBE)

Tenancy by the entirety is a Joint Tenants with Right of Survivorship account but with additional protection, explained Courtney Richardson, a Philadelphia-based tax attorney and founder of The Ivy Investor. The tenants by the entirety option is only available for married couples.

“It’s meant to protect the marital assets from outside creditors because each spouse completely owns the property,” she said.

Because each spouse individually owns 100 percent of the property, as opposed to a 50/50 split like JTWROS, it is generally exempt from judgments, liens and other collection methods when one spouse is sued. When one spouse dies, the property goes directly to the other spouse without going through probate.Tenants by the entirety, however, may not be available in every state.

Joint bank account rules

The various rules between each account type can vary depending on the state and in some cases your bank. Generally speaking, with every account type, each joint owner has equal right to the entire account balance. Any account owner can withdraw or deposit as much as they like, even without the approval of the other joint owner. It is important to check with your state’s local laws; as mentioned earlier, not every state offers tenants by the entirety option.

Also, if you’re married and live in a community property state,  the rules could be very different. In most cases, if you have a divorce in a community property state with a joint account, the money is divided evenly, regardless of how much each person contributed. One of the only ways to circumvent this in a community property state is to keep the accounts separate and enter a prenuptial agreement. In both cases, you should contact an attorney in your area.

Here are some questions you should get answered before you open a joint account.

Questions for the bank:
What happens if I no longer want to be on the account with the other person(s)?
Are there any additional fees for holding a joint account?

Questions you should ask yourself and the other joint owner(s):
What are our goals for this account?
What are the rules for spending and withdrawing from this account?

Opening a joint bank account

The process for opening a joint bank account is nearly identical to opening an account for yourself. You will need the basic account opening information for all account owners such as Social Security numbers, physical address and email address. Most banks also require that each account owner is present to sign any documents. This process generally applies no matter which account title you choose.

Joint bank account pros and cons

Pros:

  • Joint bank accounts may help simplify your finances. If you and your joint owner are splitting multiple expenses, both of you could deposit the money into one account and pay the bills from that new account.
  • A joint bank account may also help you save on fees. Many banks require a minimum balance or a monthly direct deposit to waive monthly fees. Combining your funds may allow you to stay above the minimum balance easier; if you don’t have direct deposit but the joint owner does, this may qualify you to avoid the fee.
  • Also adding joint owners also increases your FDIC coverage. The FDIC covers up to $250,000 per person, per bank, and per deposit type. If you have a joint account with someone, you are granted $250,000 per co-owner. A joint account with two people would have an FDIC limit of $500,000.

Cons:

  • Having a joint account could also cause some problems. If you feel your co-owner doesn’t put in their fair share, it may cause tension in the relationship. For example: If you put in 80 percent of the money into the account and the other owner puts in only 20 percent, that co-owner can legally spend 100 percent of the money and you may have very little recourse if they spend in a way that you disagree with.
  • Additionally, if you enjoy financial privacy to buy gifts or spend money on personal items, know that the co-owner will have access to see and monitor everything that is going on in the account.

Finding the best joint bank account

Joint bank accounts often have the same benefits as individual accounts at most banks. Very rarely will you see a benefit such as no ATM fees or no monthly maintenance fees simply because the account has an additional owner. The easiest way to find the best account option is to look for the best individual account and open it as a joint account.

As with any account, you’ll want to look for a bank that charges very few fees (if any) with benefits that help you accomplish your goals. For most people, this includes free bill pay, no ATM fees, a large number of ATMs, online account access and a low minimum balance requirement. If you’re looking to open a joint savings account, you might also look for a high interest rate. You can begin looking for the best bank accounts here.

Closing a joint bank account

The process for closing a joint bank account will vary by bank, though it is typically straightforward. However, if you are married and you’re closing the account due to divorce, the process could be different, especially in a community property state.

Most banks will allow one joint owner to close the account while others may require all account owners to be present to dissolve the account. Just like a regular bank account, you’ll want to make sure there aren’t any pending automatic bills that are still attached to the account or any outstanding checks. These could trigger the account to stay open, and you could be hit with a fee as well. How the money is split between joint owners should be discussed in advance to avoid any confusion and strain on the relationship.

Joint bank account alternatives

Due to different spending habits and financial responsibilities, joint accounts aren’t for everyone. If a joint account does not work for you, you may want to consider a linked account. Linked accounts are tied together at the same bank but owned individually. This allows funds to be transferred between people more quickly while still maintaining your independence. You will need to check with your bank for their specific rules on which accounts can be linked and how many can be linked at one time.

A convenience account may be a fitting option for those who may be taking care of older family members. Convenience accounts grants someone the ability to write checks, pay bills and perform other banking functions for the account holder, according to the legal, regulatory and business company LexisNexis. These accounts do not offer a survivorship option and the additional person added to the account is not a co-owner. When the account owner dies, the money goes to the estate and not the convenience signer. The option isn’t common and is not available in every state. If it is an option in your state, you may want to speak directly with the bank manager since these accounts are so rare.

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Kevin Matthews II

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