Many people hold a joint bank or building society account either with their spouse or partner or sometimes with another family member. This article will suggest some of the difficulties encountered with joint accounts and the common misconceptions regarding ownership of the funds.
There are a variety of reasons for holding an account in joint names, for example where a couple own a property together and both wish to contribute to household expenses or mortgage payments, they might find a joint account the most convenient way to arrange this; or where two people who run a business together, a joint account would allow them both to have access to and authority over the funds. In both of these situations, if one person is taken ill very suddenly or is abroad for an extended period, it can be very useful to have a joint account.
Another situation, which is becoming more common, is where a parent will have a joint account with an adult child, to allow the child to access the funds on the parent’s behalf. Particularly if the parent is elderly or not in good health and has difficulty in going to the bank in person or in using telephone or internet banking. This is often seen as the most convenient way to assist the parent to manage their finances, but it can in fact be the cause of many difficulties. For example, should the parent lose his or her mental capacity or on the parent’s death, there is a question over what authority the child has to continue to manage the account.
It is often the ownership of the funds in the account which can cause the most difficulty. Where both owners have contributed equally to the account, then they own the funds in equal shares and if the account were to be closed by them, then the funds would be shared equally between them. However, if all of the funds have in fact been provided by one of the owners, for example where the account was originally in the parent’s sole name and the adult child’s name was added to the account, then all the funds continue to belong to the parent and on his or her death, all the funds are still part of the parent’s estate. This point is often misinterpreted or overlooked completely.
The legal principle relating to joint accounts is that they are usually subject to the standard rule of survivorship – that is to say, upon the death of the first owner, the entire account passes to the co-owner absolutely. Where the account is held by a couple, this is often what they would want and does not cause any difficulty. However, many people do not realise that, even if they have made a Will setting out how they wish their estate to pass on death, assets held in joint names, such as property and bank accounts, will pass automatically to the surviving owner outside of the estate and regardless of the terms of the Will. Therefore an elderly parent, who has made a Will some years ago and then adds a child’s name to a bank account at a later stage, may not be aware that the account will not pass in accordance with the Will, but will pass directly to the child. This is very likely to cause a dispute within the family if the parent has other children and the account holds substantial funds.
A related point regarding joint accounts on the death of one of the owners is the Inheritance Tax treatment of the account. In a situation where all of the funds have been provided by one owner, the amount in the account on the death of that owner must be included in the value of the estate for Inheritance Tax purposes. This can be overlooked by people administering a relative’s estate without professional assistance and misleading information is often given by financial institutions and other organisations, whose own requirements in order to deal with the assets of the estate may differ from the duties of the Executor in administering the estate correctly.
Another disadvantage of joint accounts is unauthorised withdrawals, which can be very hard to prevent unless the appropriate mandate is put on the account when it is set up, for example that the account requires two signatures to withdraw funds. Of course, the drawback to this is that if one owner is not well enough to sign then the other would not be able to withdraw funds if they are needed and this would defeat the object of the joint account. Unfortunately, there have been cases where a family member has withdrawn the funds of an elderly relative for their own benefit. It can be very difficult to prove whether or not the withdrawal was authorised and if it was not authorised it is also difficult to recover the funds.
There is nothing wrong with setting up a joint account as long as both parties are aware of the drawbacks of doing so and how the account should be dealt with in the event of the mental incapacity or death of one of the owners. For older people who wish to give authority to a family member to assist with their financial affairs, the recommended solution is to make a Lasting Power of Attorney for Property and Financial Affairs, which is a legal document allowing someone to give one or more people formal authority to help make decisions about property and financial affairs or, where the person cannot make decisions due to mental incapacity, the Attorneys would make those decisions on their behalf, acting in their best interests.