When considering the opportunities and risks associated with joint accounts, you should reflect on the estate and overall financial goals you are seeking to achieve. There may be alternative strategies that accomplish those goals with less risk. These may include:
- Lifetime gifts: Where your goal is to minimize probate tax payable on death, lifetime gifts may be an alternative solution to joint accounts. A parent can make gifts during his or her lifetime to adult children. Such gifts reduce the size of the parent's future estate, which sets the stage for probate tax savings, and avoids the right of survivorship issue that can lead to disputes over joint accounts. However, gifts of capital property, such as publicly traded securities, generally result in a deemed disposition and an accompanying tax liability. For this reason, gifts of cash or capital property without large accrued capital gains may be preferable. While this strategy may reduce probate taxes, it also involves the parent's complete loss of control over the gifted assets. Also, the gifted assets may be put at risk of creditor and family law claims once in the hands of the adult child. The adult child may also face future income tax liabilities if the assets are subsequently invested.
- Power of Attorney: A person who wishes to receive assistance with the management of finances may consider making a Power of Attorney dealing with property and finances (the document has different names depending on your province, such as "Continuing Power of Attorney for Property" or "Enduring Power or Attorney"). In a Power of Attorney, you can name one or more people to act as your substitute decision-maker for property and finances. The Power of Attorney may apply to all your property and finances or may be limited to specific assets such as certain financial accounts. The document may be structured to be effective upon execution and to remain in effect if you experience an incapacity, whether due to an illness or accident, that leaves you unable to manage your property and make your own financial decisions. The person or people appointed under a Power of Attorney are considered fiduciaries who must always act in your best interest. A Power of Attorney can generally allow you to obtain assistance with your finances, such as paying bills, without the loss of sole ownership, income tax consequences and exposure to creditor and family law claims that may arise when a sole account is made into a joint account.
- Alter ego trust or joint partner trust: A person who creates the trust, who is called the "settlor", must be the only beneficiary of the trust during the remainder of his or her lifetime. On the death of the settlor, the trust assets can be paid out to beneficiaries, such as family members. An alter ego trust can accomplish several objectives for the settlor. It can allow trustees to assist the settlor with the management of finances during his or her lifetime, while also avoiding the need for probate on assets held in the trust. There is, however, the potential for increased taxes payable on death since the assets are taxed in the trust at the highest marginal rate rather than at the individual's marginal rate, and the opportunity for graduated rate estate tax rates is not available. A joint partner trust is similar to an alter ego trust, except that the trust may be settled by spouses or common-law partners who must be the only beneficiaries for the remainder of their lifetimes.
In some cases, joint accounts can be an effective estate planning and broader financial strategy, but they typically carry risks that may be significant. Importantly, Edward Jones cannot provide tax or legal advice. Therefore, if you are considering whether to put assets into joint accounts with your spouse, adult children or other family members, or if you are considering any of the items mentioned above, you should consult with your tax and legal advisors to fully understand the potential opportunities and risks that relate to your specific situation.
Talk with your Edward Jones financial advisor to make sure your strategy stays on track to meet your long-term financial goals.