A joint account is an asset or account with more than one owner.
For a variety of reasons, financial accounts might be owned by more than one person. Usually, this is an issue of sharing accounts between married persons and relates to inheritance issues, but it can be used to manage control among business partners.
There are two basic variations of a joint account. The differences largely come down to how the transition of account ownership is handled at one owner’s death. The two variations are joint tenants in common and joint tenants with rights of survivorship.
A joint tenants in common account allows for many owners and allows for owners to be added at a later time.
For example, three partners own an asset. Owner A owns 50% while the other two (Owners B & C) own 25% each. Owner A decides to sell a portion of his asset to Owner D, who now owns 10% of the total asset. Owner A then dies.
Under a tenants-in-common arrangement, Owner A’s remaining share belongs to his or her estate, rather than being transferred to the other owners.
Owner A’s estate representative can determine the status of the asset and choose to retain ownership or divest the asset. In the event of a death, it is common for the tenant-in-common portion of the asset to be subject to the probate process.
Note that many tenants-in-common arrangements will have formalized agreements as to the status and transfer of the asset at an individual owner’s death, disability or wish to sell the asset. In business, this is commonly referred to as a buy/sell agreement.
The second form is a joint tenants with rights of survivorship. This is most commonly seen among related parties, with husband and wife being the most common.
In this kind of joint account, ownership is generally equal between all owners. Upon the death of one owner the remaining owner or owners receives a proportional share of the deceased’s share with no pass-through to the estate of the deceased.
This designation thus generally avoids or negates the probate process for the particular asset or account in question.
A joint account is attractive for couples when it comes to estate planning. Note that there is no marriage or other legal requirement for an asset to be held with a rights of survivorship designation. Instead, the designation simply means that the parties involved recognize how the asset transfer will occur at death among the surviving owners of the account.
Joint accounts generally are considered to be non-qualified accounts. Owners of a joint account should be aware of the tax implications of joint accounts, especially as it relates to a step-up in equity basis at death and gifting purposes.
Owners also should be aware that a joint account is subject to attachment by a creditor if one of the owners has credit, bankruptcy or legal issues. Owners must agree unanimously to the sale or disposition of the joint asset; majority rule does not apply. Additionally, state-specific laws regarding taxation and transfer after death might apply to a joint account.
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