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Joint accounts with a mother or father appear as a perfect option to prepare for any emergency. Is it really the most efficient option? What happens if you have a joint bank account with your parent and your parent dies? How does the succession occur? Is there any tax to pay? In this article we tell you everything you need to know and how to operate in the case of a joint account with a deceased parent. 

At Ortiz & Ortiz we have experienced inheritance attorneys who can help you with your case. Our offices are located in Queens and Manhattan, but we also have virtual consultations for all five boroughs of New York. Contact us! 

What happens if you have a Joint bank account with your parent and your parent dies

“Wanting to help loved ones when I am gone.” This is the main reason why people decide to create a joint bank account. A parent decides to include a child in their bank account to ensure their financial security for when they are gone. So far it is conceived as a way to plan the estate and act in case of an eventual emergency. However, is this the best option, and what really happens if you have a joint bank account with your parent and your parent dies?

When that parent adds their child as a joint owner of a bank account, it has the best of intentions. But at the same time, it is a decision that can lead to many problems. It can generate confrontations or arguments between all the children or be detrimental to your own estate. 

How does a joint bank account work?

Having a joint bank account means that one or more people have full access to the money in the account. This is regardless of who opened the account in the first place and regardless of who makes the deposits. 

Main features of a joint bank account: 

joint account with a deceased
  • The joint bank account allows the person or persons who have access to make use of the money in the account. In short, the money in the joint account is now owned equally by the parent and the child. And this gives you the full right to use or withdraw money at any time without the parent’s consent even though the parent may have owned the account in the first place. 
  • The persons in a joint account can be family, i.e., parent and child or spouses. Although a joint account can still be created with a best friend, neighbor, distant relative, or whomever the account holder wants.
  • One of the main purposes of joint accounts is estate planning. However, there are those who use them so that the family can easily pay co-owner bills in the event the person dies or simply becomes incapacitated. 
  • Regardless of who originally owned the account and who makes the deposits, the joint bank account belongs to both people. This means that in the event of debts, creditors or lenders could seize the money in that account to pay the delinquent accounts. However, before the creditor can take the money, there must be a lawsuit involved. 

Note: You may be interested in our article How to find out if I owe debts in the United States. Also, we recommend you to read What happens if I am sued and I can’t pay or I can go to jail for debts. 

So what happens when there is a joint account with a deceased parent? 

  • The money that was in the account at the time is automatically transferred to the joint owner. When a joint account is created, most of the time it is set up as “Joint with Rights of Survivorship”. This means that the joint owner immediately becomes the owner and all assets are transferred to the survivor of the account.
  • Although such a transfer does not mean that there are no taxes to pay. Bypassing the estate does not give a direct pass for not paying taxes. You will most likely have to pay inheritance tax. 

What are rights of survivorship?

Rights of survivorship are rights that provide that if one of the account owners dies, the other owner remains the owner. They also provide that the surviving owner will have access to all the money in the account, regardless of whether the owner opened the account in the first place. 

In general, joint accounts carry automatic rights of survivorship. In some financial institutions, additional documents must be signed for this to happen. Although it is always best to be sure and check with your respective financial institution. 

Pros and Cons of Adding a Child to a Joint Account

If you are thinking about adding a joint owner to your bank account, be aware of the advantages and disadvantages. Many times wanting to ensure the financial security of a loved one can lead to some problems. It can lead to clashes with your other children, monetary costs to your estate, or tax costs.  

Advantages of having a joint account

There are certainly some advantages to having a joint account. It is important that you are clear about the objectives of having a joint account as part of your estate planning. 

  • A joint account can safeguard the finances of an elderly parent who may be somewhat forgetful. In that sense, a child as a joint owner can oversee the payment of bills and prevent double billings. 
  • In the event the owner is alive but incapacitated, the co-owner could manage the account and continue to pay bills, taxes, medical bills as appropriate. 
  • In the event of death, it can provide financial security for your child, as they will automatically become the owner of the account and the money in it. However, be careful, as if you have more than one child this could create more problems than solutions.

Disadvantages of having a joint account

There are many estate planning instruments and joint accounts are not always the best option. Let’s see why it is not advisable to opt for a joint bank account. 

Financial problems of the co-owner. If the child or co-owner has financial problems, creditors or lenders could sue them and then access the funds in the joint account to pay the debts. In this sense, having added a child to safeguard the parents’ money may have the opposite effect. 

  • The joint account acts over the will. This is something that is generally not taken into account when adding a child as a joint owner of the account. Once the parent dies, all funds in the joint account become 100% owned by the co-owner. This is true whether or not that parent has left a will dividing those funds equally among their children. The other children will not receive a share of the joint account, as it belongs to the child who remains the owner. Of course, it will be up to the new account holder to decide if they wish to share those funds with their siblings, but there is no legal obligation to do so. 
  • It can ruin the estate plan envisioned by the parents. If the child who becomes the account owner decides not to share the funds with their siblings, they cause the other children to be disinherited. This completely ruins the estate plan that the parents had envisioned. 
  • The joint account could become the child’s estate for state estate tax purposes. You as the parent may have included your child in the joint account to ensure a financially secure future for them or simply to manage their accounts for you when you are no longer able. However, should your child predecease you, half of the value of the account may automatically be included in the child’s estate for state estate tax purposes. 

What happens to taxes If you had a joint bank account with your parent and your parent dies?

taxes in joint accounts

Inheriting a joint account with deceased parent is fairly straightforward. The joint owner becomes the account holder and all the money in the account passes to their estate. So far it seems like the perfect deal, but it has some tax consequences that are important for you to be aware of. 

Below, we will discuss each of the consequences according to the different types of taxes that could apply. 

Income Taxes

Upon the death of the joint owner of the account, the new owner will be responsible for paying any taxes owed. This means that after the date of death of the joint owner, whoever takes possession of the joint account will pay the income taxes due on the income earned by the account.  

The amount of taxes owed will depend on the type of account. If it is a basic checking or savings account the amount could be negligible. However, if it is an investment account the taxes due could go up. 

When to pay income tax?

  • Income earned on the joint account before the death of one of the joint owners will continue to be reported in the same manner. That is, the same as before the joint owner took sole control of the account. 
  • Information on taxes payable will appear on the decedent’s final income tax return. This will depend on whether the decedent reported all of the income from the account or had it arranged before death to be divided among the joint owners. 

Estate Tax

A bank account, joint or not, is going to be part of a person’s estate. In that sense, if one of the joint owners of the joint account dies, a portion of that account will contribute to the decedent’s taxable estate. This happens despite the fact that the joint account is not subject to probate or to the last will of the deceased person expressed in their will. The account automatically becomes the property of the joint owner. 

Some points to keep in mind:

  • Probate estates and taxable estates are two very different things. 
  • Testamentary assets are those that require some mechanism or legal process to pass to a living beneficiary. Under that logic, joint accounts that have rights of survivorship do not need any paperwork. 
  • Taxable assets include anything in which the decedent had an ownership interest at the time of death. 
  • You may need to check with the executor of the estate in New York to see if the decedent left a probate estate. However, at the federal level only large estates are subject to estate taxes. Therefore, it is highly unlikely that you will have to worry about the estate tax associated with an inherited joint account.

Note: Read our article on Testate and Intestate Succession. Also on the difference between executor and administrator of the estate and the difference between executor and trustee. 

Inheritance Tax

Inheritance tax applies to a specific gift or bequest and is paid by whoever receives the asset. This differs from estate tax, which is a percentage of the deceased person’s total estate and is paid out of the estate itself.  

In some cases, there are individuals who, as part of their estate planning, leave instructions that their estate be the one to pay inheritance tax. This, in general, with the objective of alleviating the burden to the one who is being benefited with the inheritance. 

Some points to keep in mind:

  • There is no federal inheritance tax. However, there are states that still charge inheritance tax. These are: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, Oregon, Rhode Island, Vermont, and Washington.
  • To find out if you must pay an inheritance tax on the inherited joint account you will first need to look at the law of the state where the decedent lived.
  • The inheritance tax rate will vary depending on how closely related you are to the decedent. For example, spouses usually inherit tax-free, while immediate relatives may be taxed at a reduced rate. So, if the joint owner of the joint account who dies is the parent the tax will likely be relatively  low.

Other estate planning options to keep in mind

Joint accounts can bring some problems and are not always the best option for proper estate planning. Get advice from an experienced attorney who can guide you through this process. Here are some other types of estate planning that can be of great help to you. 

Power of Attorney

  • As the name implies, through a power of attorney, you are granting “power of attorney” to a person to act on a specific circumstance. 
  • You are going to allow that designated person to make decisions or perform the actions conferred in the document signed before a notary. 
  • The most common ones are related to medical, legal or tax issues.
  • The power of attorney is not a form that is completed and delivered. There are several types of powers of attorney. There is the durable power of attorney, simple power of attorney, medical power of attorney, among others. 

Last will and testament

  • The last will and testament is a document through which a person expresses their last will. 
  • In the will you should name a personal representative to carry out your final requests, name beneficiaries who will inherit the property you have, name a legal guardian for your children, and so forth.
  • Make sure the document is signed, updated and as complete as possible so that there are no doubts once you are gone. 
  • Also, make sure your will is in line with applicable state law. 
  • When the person who created the will dies, the probate court must consider it valid. Thus, through the process called probate, the estate will be distributed to the beneficiaries you stipulated in your last will. 

Note: Review the difference between trust and will. Also, read our articles related to wills: Steps to contest a will and Undue influence in wills. 

Irrevocable and Revocable Trusts

  • Like the power of attorney and the will, the trust is an estate planning instrument. 
  • It is an agreement between the settlor, the creator of the trust, and the trustee, who is appointed by the settlor to manage and distribute their assets properly among the beneficiaries. 
  • The trust is a document whose purpose is to protect and manage the assets of the estate according to the ultimate wishes of the settlor.
  • There are two types of trusts: irrevocable and revocable. A trust is irrevocable when the agreement is of a permanent nature. This means that the assets that enter the trust are beyond the control of anyone other than the trustee. On the other hand, a revocable trust is created by the settlor and is effective during its life as long as it is funded with assets.   

Experienced New York State Probate Attorneys

We discuss the advantages and disadvantages of using a joint account with a deceased parent as a way to plan your estate. While it can be useful while the parent is alive to help you manage your finances, it can also be a problem if there are more children or costs to the estate. 

We know that planning for what happens when you are gone and how to distribute your property and assets in a way that secures your family’s financial situation can be difficult. That is why it is important to have experienced estate planning and probate attorneys who can guide you. 

At Ortiz & Ortiz we have experienced estate planning attorneys in New York who can assist you in this process:

  • Advise you on the best way to financially secure your loved ones. 
  • Find the best instrument that best suits your needs.
  • Orient and guide you in the drafting of the document and to do all the paperwork. 
  • Once you are no longer with us, advise your family in the succession process. 

Now you know more about what happens if you have a joint bank account with your parent and your parent dies. Contact us today and let us know your case!