What Happens to a Joint Account When One of the Owners Dies?

There may be income tax, estate tax, and other consequences.

Joint account legalities
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When a loved one dies, particularly when it's unexpected, it can leave family members scrambling for cash just to pay for the basic necessities of life, at least for a while. If his bank account was held in his sole name, it technically cannot be touched or depleted except through the probate process. 

But "sole name" is the key term here. The situation can be different when the bank account is a joint account and one owner dies.

How Does a Joint Account Work?

With a joint bank account, one or more people have full access to all the money contained in it, regardless of who opens the account or who makes most or all of the deposits. These individuals can be related, such as a parent and adult child, or they might be spouses, but they don't have to be. You could open a ​​joint account with your neighbor or your best friend if you wanted to. Joint accounts are often set up between parents and adult children for estate planning purposes or so that the child can easily pay the parent's bills should the parent become incapacitated. 

The important thing to consider is that you both have equal access to the funds, and so do each of your creditors. If your account co-owner is sued for defaulting on a loan, it's possible that the creditor could seize the entire account, although this depends on individual state law. 

Joint Accounts With Rights of Survivorship 

Most joint accounts come with "rights of survivorship," an arrangement that's called "tenants by the entirety" in some states.

If one of the account holders dies, the survivor can take over full ownership of the account simply by presenting the deceased owner's original death certificate to the financial institution where the account is held.

Joint accounts typically do not contribute to the decedent's probate estate, which means that the terms of the account supersede the decedent's will.

He generally cannot leave that money to anyone else. 

If you're contemplating opening a joint account or if you already have one, check with the financial institution to find out if it carries automatic rights of survivorship. You might have to sign additional documents to indicate that this is what you want. But as long as it carries these rights, the surviving owner would continue to have full access to the money even if the co-owner of the joint checking account dies. 

Income Tax Consequences of Inheriting a Joint Account

There could be tax and other consequences of inheriting the account when your co-owner dies. 

When you take over sole ownership of the account, you'll become fully responsible for paying any tax that comes due on income earned by the account after the date of death. This can be negligible with a basic savings account, but much more with a well-funded investment account. 

Any income earned by the joint account prior to you taking over sole ownership would be reported the same way as it was reported before you took over the account. This means that if the deceased owner was reporting 100 percent of the account's income prior to his death and if his other assets aren't subject to probate, the income earned prior to you taking over sole ownership would be reported on his final income tax return.

If his other assets are subject to probate or if he left a living trust, you might want to work with the executor of his estate or the trustee

If you and the deceased owner were splitting the income tax bill, the income earned prior to you taking over sole ownership would be reported proportionately on your income tax return and on the account owner's final income tax return.

Estate Tax Consequences of Inheriting a Joint Account

Even though the account would not be subject to probate or be part of the decedent's probate estate, the account would contribute to his taxable estate. Probate estates and taxable estates are two quite different things. 

The entire fair market value or date-of-death balance of the joint account would be included in the value of the deceased owner's estate for estate tax purposes if the joint owner isn't a surviving spouse.

Only 50 percent of the fair market value or date-of-death balance would be included in the value of the deceased owner's estate if the joint owner is the surviving spouse.

Again, if there is a probate estate, you'll want to consult with the executor. As a practical matter, however, only very large estates are subject to estate taxes at the federal level—those with values in excess of $11.2 million as of 2018. This represents a very small number of estates, so it's unlikely you would have to worry about who pays an estate tax associated with an inherited joint account.

State estate tax thresholds can be much less, however, and they vary by state, so you'll want to consult with a local tax or estate planner to find out where you stand there. 

Inheritance Tax Consequences of Inheriting a Joint Account 

An estate tax is a percentage payable on the value of the decedent's overall estate, normally payable by the estate. An inheritance tax is levied only against a specific gift or bequest, and it's payable by the person who receives the asset, not the estate. 

The good news is that there is no inheritance tax at the federal level so this doesn't have to be a concern. And only six states impose an inheritance tax as of 2017. The laws of the state where the account owner died would dictate whether you would be required to pay an inheritance tax on the account. The tax rate typically depends on how closely you were related to the decedent. Spouses typically inherit tax-free. Immediate kin pay a reduced percentage, so you would owe less if the account's co-owner was your parent. Unrelated beneficiaries pay the highest rates. 

Do You Have to Pay Any of the Joint Owner's Final Bills?

The answer to this question is a resounding no. The decedent's probate estate is responsible for paying off his final bills and debts. An account with rights of survivorship bypasses the probate estate and moves directly to the surviving account holder, so the money never becomes available to the estate to pay the decedent's final bills and expenses. 

The only exception is if the account co-owner also happened to co-sign on one or more of these debts. In this case, consumer law trumps estate law. You would be responsible for paying off those particular debts because you agreed to do so when you and the decedent took them on. The same would be the case if your co-owner lived but simply stopped paying on those accounts. Liability for the debts would automatically shift to you.