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

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

Text reads: "FYI: Right of survivorship for a joint account. Surviving co-owner can take full ownership of the account by presenting the deceased owner's original death certificate to the financial institution. Check with your financial institution to see if your joint account carries automatic rights of survivorship. You may have to sign additional documents to enact this feature."

Image by Catherine Song © The Balance 2020

Family members can be left scrambling for cash just to pay for the basic necessities of life when a loved one dies, particularly when the death is unexpected. A bank account held in the deceased's sole name can't be touched or depleted except through the probate process, so that money is out of reach.

But "sole name" is the key term here. Many individuals hold joint bank accounts with someone else, and this avoids that problem.

How Does a Joint Account Work?

One or more people have full access to all money contained in a joint bank account, regardless of who opens it or who makes most or all of the deposits. These individuals might be related, such as a parent and adult child, or they might be spouses, but they don't have to be. You can open a ​​joint account with your neighbor or your best friend if you want to.

Joint accounts are often set up with others for estate planning purposes, so the family can easily pay either co-owner's bills should she die or become incapacitated. 

Each co-owner's creditors also have legal access to the funds in a joint account. It's possible that a creditor could seize the entire account if one of the co-owners defaults on a loan or another debt, although this depends to some extent on individual state law and the creditor must typically file a lawsuit first.

Rights of Survivorship 

Some joint accounts come with "rights of survivorship," an arrangement that's called "tenants by the entirety" in some states when the account is held by spouses. The surviving co-owner can take full ownership of the account when the other account holder dies simply by presenting the deceased owner's original death certificate to the financial institution.

Check with your financial institution to find out if your joint account carries automatic rights of survivorship. You might have to sign additional documents to indicate that this is what you want. The surviving owner would continue to have full access to the money even if the co-owner of the joint checking account dies, as long as the account carries these rights. 

Income Tax Consequences

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

Any income earned by the joint account prior to you taking over sole ownership would be reported more or less the same way as before you took over the account. The income earned prior to you taking sole ownership would be reported on the decedent's final income tax return if he was reporting 100% of the account's income prior to his death, or you might split it if this was your arrangement before his death.

It can complicate the tax situation if the decedent's 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 this is the case.

Estate Tax Consequences

A portion of the account will contribute to the decedent's taxable estate, even though the account itself wouldn't be subject to probate. Probate estates and taxable estates are two quite different things. 

Probate assets are those that require some legal mechanism to pass to a living beneficiary after death, and joint accounts with rights of survivorship do not. Taxable assets include basically anything the decedent had an ownership interest in at the time of her death.

You'll want to consult with the executor of the estate if the decedent left a probate estate. But as a practical matter, only very large estates are subject to estate taxes at the federal level—those worth $11.58 million or more as of 2020, and only the value over this amount is subject to the tax. It's unlikely you would have to worry about who pays an estate tax associated with an inherited joint account.

Twelve states and the District of Columbia have their own estate taxes as of 2020, separate from the federal tax. Their value thresholds can vary considerably from that at the federal level. Check with a local attorney to find out if your state is one of them and if you have anything to worry about tax-wise at the state level.

Inheritance Tax Consequences

An estate tax is a percentage payable on the value of the decedent's overall estate, and it's 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. Some decedents leave instructions that their estates should pay any inheritance taxes due, however, to take the burden off the beneficiary.

The good news is that there's no inheritance tax at the federal level, and only a few states impose an inheritance tax. The laws of the state where the account owner lived at the time of their death would dictate whether you would be required to pay an inheritance tax on the account.

Inheritance tax rates typically depend 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 to this rule is if the account co-owner also happened to co-sign on one or more of the debts in question. Consumer law trumps estate law in this case.

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.