Joint bank accounts between parents and adult children are common. Not only do they offer convenience, but they can be an effective tool for managing a parent’s finances, especially as they age. However, when a parent who is a joint account holder passes away, the legal and financial implications can get complicated.
As estate planning attorneys, we regularly advise clients on the nuances of joint accounts and their impact on overall estate plans. Here’s what to know about joint bank accounts and what happens when an owner passes away in North Carolina.
Joint bank accounts in North Carolina are financial arrangements where two or more individuals share ownership and access to the funds within the account. These accounts are governed by state law and typically come with a right of survivorship, meaning that when one account holder dies, the surviving account holder(s) automatically inherit the deceased’s share.
In North Carolina, you’ll commonly encounter two types of joint accounts:
JTWROS is the more common arrangement, where surviving account holders inherit the deceased’s share automatically. Tenancy in Common, on the other hand, allows the deceased’s share to pass according to their will or state intestacy laws.
Each joint account holder has equal rights to deposit, withdraw, or manage the funds in the account. This shared access can be incredibly helpful when adult children need to assist their parents with bill payments or other financial tasks. However, it’s crucial to understand that this also means any account holder can potentially drain the account without the other’s consent.
When a parent who is a joint account holder passes away, several legal implications come into play. Understanding these can help families navigate this difficult time more smoothly.
In North Carolina, if the joint account has a right of survivorship, the funds automatically become the property of the surviving account holder(s). This transfer happens by operation of law, meaning it occurs regardless of what the deceased parent’s will might say about the account.
One of the primary advantages of joint accounts with right of survivorship is that they avoid probate. Probate is the legal process through which a deceased person’s estate is settled. Assets that pass outside of probate, like joint accounts, can be accessed more quickly by the surviving owners.
North Carolina General Statute § 41-2.1 specifically addresses the survivorship rights in joint accounts, stating that upon the death of one joint tenant, the survivor becomes the sole owner of the entirety of the account.
While the automatic transfer of joint account funds can be convenient, it may conflict with the overall estate plan. For instance, if a parent intended to divide their assets equally among all their children, but only one child is named on the joint account, this could lead to an unintended imbalance in the distribution of assets.
In the past, this was a common strategy to avoid probate because as a taxable transaction, the IRS never prosecuted such actions. It is no longer a safe strategy as the Biden Administration is hiring 87,5000 tax agents to prosecute and penalize these types of transactions.
The financial implications of inheriting a joint account can be significant and multifaceted.
In North Carolina, there’s no inheritance tax to worry about. However, federal gift tax considerations may come into play if the joint account was funded primarily by the deceased parent. It’s crucial to consult with a tax professional to understand the potential tax consequences.
Joint accounts may be subject to creditor claims, both during the parent’s lifetime and after their death. In North Carolina, creditors may be able to reach the funds in a joint account to satisfy the debts of either account holder.
Joint accounts can affect Medicaid eligibility and may be subject to Medicaid estate recovery after the death of a Medicaid recipient. North Carolina’s Medicaid Estate Recovery Program, as authorized by N.C.G.S. § 108A-70.5, allows the state to seek reimbursement from a deceased Medicaid recipient’s estate for benefits paid.
While joint accounts offer convenience, they’re not without drawbacks. Let’s weigh the advantages and disadvantages.
Consider these alternatives that may provide similar benefits with fewer risks:
Unfortunately, joint accounts can sometimes lead to legal disputes among family members. Common issues include:
Siblings might claim that the joint account was set up due to undue influence, especially if one child had a closer relationship with the parent.
Questions may arise about whether the parent had the mental capacity to understand the implications of creating a joint account.
In some cases, there might be allegations of fraud if an account holder misused the funds or set up the account without the parent’s knowledge.
Integrating joint accounts into an overall estate plan requires careful consideration. It’s crucial to balance the convenience of joint accounts with other estate planning tools to ensure your parent’s wishes are carried out effectively.
Clear communication with family members about the purpose and intended distribution of joint accounts can help prevent misunderstandings and potential conflicts down the line.
When a parent who is a joint account holder passes away, there are several steps to take:
Remember, while the surviving account holder has the right to the funds, it’s wise to consider the overall estate plan before making any significant changes or withdrawals.
To avoid potential issues, consider these best practices:
While joint bank accounts can be a useful tool in managing finances with aging parents, they come with significant legal and financial implications, especially when a parent dies. It’s crucial to understand these implications and consider how they fit into the broader estate plan.
If you have questions about joint bank accounts or estate planning in North Carolina, don’t hesitate to reach out to Johnson Legal, PLLC. Our team can provide the guidance you need to make informed decisions and ensure your family’s financial well-being. Contact us today to schedule a consultation and take the first step toward securing your family’s financial future.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
