Joint Bank Account Rules: How Do They Work?

Joint bank accounts can be a useful tool for sharing expenses or assisting someone in handling their finances. Joint accounts can help you budget and meet day-to-day expenses in situations that involve multiple people. However, they can also complicate your tax situation and generate liability concerns.

How to Open a Joint Bank Account

To open a joint account, you must complete an application with the personal details of all the account holders. In addition, some banks may request proof of address and identity in the form of utility bills, passports or driver’s licenses. Often, you may find that banks require the presence of all the people you plan to add as joint account holders.

There are several other reasons why opening a joint account is best done in person. Doing so allows you to work with a banker to address important details around account ownership and access that you may want to customize for your particular situation. While most joint account holders will be satisfied with standard industry practices, there's nothing wrong with covering all your bases when entering a financial arrangement in which other people can access your money.

Joint Bank Account Rules: Who Owns What?

All joint bank accounts have two or more owners. Each owner has the full right to withdraw, deposit, and otherwise manage the account's funds. While some banks may label one person as the primary account holder, that doesn't change the fact everyone owns everything—together. Once money is deposited, all of it belongs fully and equally to each account holder regardless of the source.

Once an account is established, any account holder can also close the account entirely. Given these rules, putting your money into a joint bank account obviously requires a great deal of trust in your fellow account holders. While no account holder can remove another account holder from a joint account without that person's consent, few banks will stop you from withdrawing or transferring the entire balance on your own.

The most common joint account holders include parents and their children, spouses, and other close family members. Joint accounts work best when the account holders maintain an honest, communicative relationship about the money. Failing that, setting up automatic mobile notifications on the joint account's activity is another way to ensure that everyone stays informed.

What Happens if a Joint Bank Account Holder Dies?

Most of the time, joint bank accounts have what is called a right of survivorship. This means that upon the passing of one account holder, the account funds will go to the surviving account holders in equal portions. Most joint accounts have just two account holders, in which case the surviving account holder receives 100% of the funds in the account.

In the other scenario, a joint account might operate under another rule called "tenancy in common". When an account holder passes away in this case, their share of the joint account passes to their estate. For example, if there are two account holders and one dies, the survivor receives 50% of the balance—unless the account holders previously agreed to a different allotment. The remaining 50% is distributed according to the will of the deceased or state law if no will exists.

In any case, the surviving account holders should present a copy of the decedent's death certificate to their bank as soon as possible. This allows the bank to retitle the account in the survivors' names and avoids issues with accessing the account in the future.

Joint Account Beneficiaries

Another thing to consider in the case of the death of an account holder is the position of beneficiaries. A beneficiary gets the money in the account upon the passing of all account holders. Any living joint account holder can change the account's beneficiaries at any time. In a joint account organized under the right of survivorship, all of the funds will go to the surviving account holder.

Because the surviving account holder will then have unilateral authority to change the account's beneficiaries, it is critical that you choose a trustworthy joint account holder in a right of survivorship situation. By contrast, a joint account with tenancy in common allows you to pass your share of the funds directly to your beneficiaries in the event of your death. This prevents any potential changes to the allotment of funds after your passing.

Pros and Cons of a Joint Account

Essentially, joint bank accounts offer convenience and flexibility at the cost of exposing you to errors or misbehavior by your joint account holders. By concentrating earnings and expenses in a single place, you make it easier to understand and manage your household budget. However, joint accounts also contain multiple pitfalls you must be aware of.

When you have a joint account with someone, their problems often become your problems. Bank fees like overdrafts are applied to a joint account balance regardless of who triggers them, and the creditors of another account holder can seize the balance by court order even if other account holders have no part in the debt. While some states may provide legal avenues for you to protect part of the balance from such action, that process is time consuming and potentially costly.

Joint Accounts Complicate Taxes, Divorce, and Benefits

Joint bank accounts may also complicate your tax situation. All owners of a joint account pay taxes on it. If the joint account earns interest, you may be held liable for the income produced on the account in proportion to your ownership share. Also any withdrawals exceeding $14,000 per year by a joint account holder (other than your spouse) may be treated as a gift by the IRS. This may subject you to gift tax.

If joint account holders are married, divorce can change how your joint account is handled. For instance, New York state law automatically dissolves a right of survivorship on a joint account between two divorced individuals. In other states, the account remains as is unless and until one or both account holders close the account or change the terms. This means a divorced couple could continue to have equal access to an account long after they intend to.

Finally, the funds in a joint account can potentially reduce your eligibility for benefits. This is because joint accounts can inflate individual assets beyond realistic measures. For example, if you hold a joint account together with your college-bound child, the funds in that account can count towards your child’s assets. These additional assets can reduce his/her eligibility for financial aid. The same can also be true of an elderly co-owner and their eligibility for Medicaid.