Be Careful with Joint Bank Accounts

Do you have a joint bank account with your spouse, parent, or significant other? If so, you may be surprised to learn that both you and any other joint owners each own the entire amount in the account, rather than owning it in equal shares as many people incorrectly assume.

Jointly owned bank accounts are also different from other kinds of jointly owned property, such as a house or a car. For example, although a joint tenant in real property may not convey the interest of another joint tenant without his or her consent, a party to a joint bank account may withdraw all of the money and spend it as he or she pleases without having to get anyone's permission. In fact, a holder of a joint bank account may usually transfer the ownership of every penny in the account simply by withdrawing the money from the account. The reason for this is because joint bank accounts, unlike other kinds of jointly owned property, are subject to the provisions of the contract between the bank and the depositors, and these contracts usually give every joint owner the right to withdraw as much money as he or she pleases.

Effectively, this means that a co-owner of a joint bank account is not liable to other joint owners of the account for withdrawing and spending all of the money in the account, because, as a joint owner, he or she has the right to do so. Once the funds are withdrawn from the bank, the person making the withdrawal becomes the sole owner of the money, regardless of who put the money into the account in the first place. Because the party making the withdrawal has the right to do so, Illinois courts will not consider the withdrawal of the money as being wrongful, unauthorized, improper, or unlawful.

If you and your new spouse were to open a joint bank account tomorrow, into which you deposited $1,000 and she deposited $100,000, you would be legally entitled to withdraw $100,999, buy a new BMW, and drive to a new life in Mexico, without being liable for any illegal conduct with respect to the use of the funds held in the joint account. (However, leaving your new wife and fleeing to Mexico might create other legal problems.)

The lessons you should draw are clear. First, you should have the utmost trust and confidence in other joint owners before creating such an account. Second, you should take the time to read all account agreements with your bank and understand the terms under which withdrawals may be made and by whom. Finally, do not be surprised if you wake up one morning and find all of "your" money gone if you fail to heed Lessons One and Two.

SOLO 401(K) RETIREMENT PLANS

A new retirement savings account is now available for "owner-only businesses." An "owner-only business" is either a business that employs only the owner and immediate family members or a business that employs only the owner and employees who by law may be excluded from participation in retirement plans. Excludable employees include employees under age 21, employees with less than a year of service or who work less than 1,000 hours per year, certain union employees, and certain nonresident alien employees.

The new plan, sometimes called an Individual (k) plan, can be set up both by incorporated businesses or unincorporated businesses such as sole proprietorships and partnerships. When compared with other types of business retirement plans, an Individual (k) plan allows more flexibility in its funding and larger contribution amounts.

The two components of an Individual (k) plan are a profit-sharing contribution from the employer (up to 25% of compensation) and an employee salary deferral (up to $13,000 in 2004). Combining those two components, the maximum contribution on behalf of any one business owner is a whopping $41,000 in 2004. Contributions are discretionary each year.

The maximum salary deferral amount will increase by $1,000 per year through 2006. In addition, for individuals who are age 50 or older, the Individual (k) plans, like 401(k) plans for larger businesses, allow "catch-up" contributions in amounts that will increase annually through 2006. For 2004, the maximum catch-up contribution is $3,000.

Business owners are eligible to take personal loans from Individual (k) plans, so long as the plan document allows for plan loans. They may borrow as much as $50,000 in cash, or 50% of the balance in their account, whichever is less. Borrowing from an Individual (k) plan carries the same downside as with conventional 401(k) plan borrowing, however, making this move a last resort for many. Aside from undermining the accumulation of a large balance growing tax-free in the account, a loan, if not paid back on time, will be considered a distribution by the IRS, triggering income taxes and a 10% penalty.

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