Joint bank accounts: what you need to know
Despite the bad headlines and the misgivings of some experts, having a joint checking or savings account with your spouse isn't really worth worrying about. (Yes, your spouse has the right to drain the account if they want to, but then you have bigger problems in your marriage to contend with). Setting up a joint account with someone you aren't married to, on the other hand, can be a different story altogether.
When you're married, with or without a joint account, your money will be affected if something bad happens to your spouse. "Even if you're getting divorced, or your spouse gets sued, it really doesn't matter if your accounts are joint or not, you're still talking about one big pool of money that you share," says David Hefty, the CEO of Cornerstone Wealth Management and a certified financial planner in Auburn, Indiana. "A lot of people, especially when their marriage gets rocky, will say, 'Oh, I need to put money in my own account,' but really, in the end, it doesn't matter."
But setting up a joint account with your college-aged child or your elderly parent, a live-in girlfriend or boyfriend, or even a same-sex partner (if you live in a state that doesn't recognize civil unions) can invite big problems, says Hefty. After all, if one of the account holders is in trouble, say with debt collectors, the other account holder is also going to feel the pain.
Joint Accounts With Your Kid, Parent or Partner
Say you have a joint account with your college-aged child and they are in a car wreck. If they are successfully sued, the money in that joint account will be considered the child's assets and can be seized for payment. Or, say you use the money in the account as collateral for a mortgage, then default on your payments. Suddenly your child is drawn into the web of your financial woes.
Hefty concedes that there are some good, logical reasons for parents to establish a joint account with a college-aged kid. If you die, the funds avoid probate and the money transfers straight to the child, he explains. But, if that is truly your goal, he recommends that you also give the child power of attorney. "That makes it legal, clean and accomplishes what you want."
And if you think by setting up a joint account with your aging parent that you're hiding your parents' assets from the government, you're not, says Hefty. "If you and your parent, or you and your child, can think of a scheme at the kitchen table to trick the government, believe me, it's already been thought of."
Joint Accounts Between Spouses
Of course, just because a joint bank account held by a married couple isn't generally discouraged by personal financial experts, it doesn't mean there aren't still problems to avoid. The personal finance expert quoted in that 1964 newspaper article was correct -- if you're not managing your account with your spouse -- you can get into a dither.
My wife and I used to routinely go into overdraft territory. If you're living paycheck to paycheck, and you're not communicating and checking that account every day, a joint checking account can be something of a financial disaster. And if your marriage is a disaster -- as in, you're in the midst of a divorce -- be sure to remove yourself from your joint checking or savings account.
One colleague of mine who recently got divorced is trying to do just that -- rather unsuccessfully. "My husband and I had a joint account with Bank of America," she said. "I had been added to his existing account. When we split, I agreed that I'd cut up my card and that would be it. I figured he'd take me off the account at some point."
He didn't and couldn't -- she needed to sign paperwork in person at the branch to remove herself. Because she now lives on the other side of the country, she can't easily show up in person to sign paperwork and take her name off the account (in fact, they want her and her ex-husband to both show up in person), and while the bank has promised twice to send her paperwork to sign, so far, she hasn't received a thing.
Don't Worry Too Much About Your Credit Rating
Meanwhile, she is worried about how her credit might be affected. While her credit rating should be fine (because we're talking about a checking account and not a credit card that they're sharing), it can still be a little unpredictable. (It's best to get a copy of your credit report and see what lenders are seeing.) In the worst case scenario, if her ex left the bank, owing it hundreds or thousands of dollars, my colleague would be responsible for paying the debt.
But that's pretty much the only thing she should worry about, nor should anyone worry that closing their joint bank account might hurt their credit standing. Gregory B. Meyer, community relations manager at Meriwest Credit Union in San Jose, California, told me, "The length of time you hold your checking account plays no role in credit approval. It is not a factor in your FICO score. Don't sweat closing a checking account. We have to close accounts for identity theft, forgery, death of a tenant and a number of other reasons."
Few Safeguards Exist
My colleague wondered if there were any safeguards she could have taken earlier, say, signing something that decreed that neither party could withdrawal a certain amount without the other's permission. Just to be sure, I called my own bank and asked a teller. At least at this bank -- and it's a national, well known bank -- there isn't any policy like that. She said that one could ask the teller to make a notation in the records that the other person would like consent before one party, say, withdrew $5,000 or more dollars, but there's no guarantee that that would work, especially if the other party, who equally owns the money in the account, insisted on making a withdrawal.
My colleague also thought that perhaps she would have been better off if she hadn't joined an existing account but opened up a new account with her husband? Not really. Either way, she would have had the same rights, and if she had opened up a new account with her husband, she would be finding it just as difficult to close the account, especially now that she is 3,000 miles away from her branch.
Remember: You're in This Together
Ryan Bailey, retail deposit product manager at TD Bank, sent me an email, encapsulating the pros and cons of a joint bank account nicely: "The deposits are the property of all the owners of the account. The bank may release all or any part of the balance of the account to honor checks, withdrawals, orders or requests signed by any owner of the account."
In other words, you're in this together. But that can work in your favor, too. "None of the owners may instruct us to take away any of the rights of another," said Bailey.
While your co-account holder could theoretically withdrawal all of your money and go on a shopping binge, at least they can't tell the bank that you're not entitled do the same thing.
For most married couples, a joint checking or savings account is simply practical, and if you trust someone enough to marry them, you should trust them enough to share your money. Either way, as Hefty notes, you're intricately linked to your spouse's finances anyway. That's pretty much the case with anyone who lives in your home and depends on you to take care of them financially, says Hefty, whether it's your high school-aged child or an elderly parent.
"You can have a teenager drinking and driving, and you're liable for their wreck, and you can have a 90-year-old parent who lives with you and is sober and wreck and do just as much damage, and you're still liable," says Hefty.
Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the new book Living Well with Bad Credit.