Joint Bank Accounts - The pros and cons
The opening of a joint bank account is a significant moment in any relationship. For many people it seems to be the logical next step, frequently occurring after a couple has moved in together. However, while a joint account can offer ease and convenience, it should be remembered that there a number of potential downsides that should be considered.
The major benefits of a joint bank account are, as has been mentioned, related to convenience. Consider the difficulties of paying bills without a joint bank account. This will involve one of the two individuals concerned having to transfer half of the amount owing into the other’s account – an apparently unnecessary hassle. Similarly, if one partner is away or otherwise unavailable, it is difficult for bills to be paid without the other individual having the authority to sign a cheque on their behalf.
DebtsThat said, joint bank accounts can also pose significant problems. These problems arise, in great part, through the legal treatment of transactions that are carried out through such accounts. When you establish a joint bank account, the co-signatories both will accept “joint and several liability”. This means that each signatory is responsible for any transaction completed by the other. If, for example, your partner makes a purchase for which there are insufficient funds in your account, you will be held jointly responsible for the debt that is incurred. This can pose real problems when it becomes impossible to pay off these debts; this joint and several liability continues through to bankruptcy.
Another important consideration is that of inheritance. When one of the co-signatories dies, all of the assets in the joint account will continue to be available to their partner as they are treated as separate from the deceased’s estate. This can present both benefits and problems. If you are certain that the individual with whom you have opened a joint account is the same individual that you wish to inherit your assets, then this is hugely beneficial as it avoids the possibility of these assets being frozen during the probate process. On the other hand, however, if you wish for your assets to pass to someone else, the preference given to the co-signatory on your joint account can clearly be problematic.
Tax ImplicationsIt is also important to consider the potential tax implications of establishing a joint account. If one of the co-signatories draws an income from savings or investment but does not pay income tax, it may well be that maintaining two separate accounts is a more tax efficient option. Any investment or savings income that is paid into a joint account is, by default, taxed on a 50-50 basis; that is, it is split equally between each of the two partners. Where one individual pays tax and the other does not, or where one pays tax at a higher rate than the other, this tax treatment may produce a higher overall tax liability than would otherwise be incurred.
Clearly, joint bank accounts have their benefits. However, the potential drawbacks, particularly those relating to debts and tax, must be considered carefully before making a judgement on whether or not opening such an account is the best course of action.