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?

With a joint bank account, one or more people have full access to all money contained the 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 best friend or your neighbor 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 they die or become incapacitated. 

Warning

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 laws, and the creditor must typically file a lawsuit first.

Joint Bank Account Rules on Death

When a joint account is created, it's usually set up as "Joint With Rights of Survivorship" (JWORS). This means that, upon the death of one account holder, the assets are transferred to the surviving account holder.

Rights of Survivorship 

Most accounts carry automatic rights of survivorship, but it's a good idea to check with your financial institution to ensure this is the case for your joint account. You may 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. 

Note

"Rights of survivorship" is sometimes called "tenants by the entirety" in some states when the account is held by spouses.

Consequences When You Inherit a Joint Account

While your rights to a joint account in the case of the co-owner's death may be fairly straightforward, there are several tax consequences you'll need to keep in mind.

Income Tax Consequences

When you take sole ownership of the account after the date of your co-owner's death, you'll become fully responsible for paying any tax that comes due on income earned by the account. This can be negligible with a basic checking or savings account, but it can be much 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 they were reporting 100% of the account's income prior to their death, or you might split it if this was your arrangement before their death.

Note

It can complicate the tax situation if the decedent's other assets are subject to probate, or if they left a living trust. In that case, you may want to work with the executor of their estate or the trustee.

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 very 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 their 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 $11.7 million or more in 2021—and only the value over that 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.

Important

Several states, as well as the District of Columbia, have their own estate taxes as of 2021, separate from the federal tax. Their value thresholds can vary considerably from 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, in order to take the burden off the beneficiary.

The good news is that there's no inheritance tax at the federal level, and only some 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 their 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.

In that situation, 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 were alive but simply stopped paying on those accounts. Liability for the debts would automatically shift to you. 

The Bottom Line

If you have a joint account and your co-owner dies, you will likely assume full ownership of the account. That's because most accounts are automatically set up as "Joint With Rights of Ownership." If you aren't sure, you can contact your bank or financial institution to find out the status of your account.

While a joint owner would likely receive full ownership of the account, it doesn't mean you're responsible for paying the decedent's debts. However, there may be income tax, estate tax, or inheritance tax consequences, depending on your situation.