Making the decision about whether to open a joint account or designate a beneficiary can be difficult. Both options have their own advantages and disadvantages, and it can be hard to decide which is best for you.
In this personal finance guide, we will compare both options and look into the pros and cons of each. By the end of this article, you should have a better understanding of which option is right for you!
Joint Account Vs Beneficiary Table of Contents
What is a Joint Account?
A joint account is a type of bank account that allows two or more people to have access to the same account. This can be useful for couples who want to share finances, or for families who want to help their children manage money.
What is a Beneficiary?
A beneficiary is somebody who you have named in your will or estate planning documents to receive assets upon your death. You can name anybody as a beneficiary: a spouse, child, family member, friend, or even a charity. When you die, the assets in your account are transferred to the beneficiaries you have named.
What is The Difference Between a Joint Account and a Beneficiary?
With a joint account, all owners have equal access to the funds and are responsible for any debt or charges. With a beneficiary, the money or assets go to the beneficiary after the person dies.
Joint accounts can be opened at most banks and credit unions. To open a joint account, all owners will need to provide identification, Social Security numbers, and other information. Once the account is open, all owners will have equal access to the funds.
Beneficiaries can be named on investment accounts, life insurance policies, and retirement accounts. When the account owner dies, the money or assets in the account will go to the beneficiary. The beneficiary will need to provide proof of death, such as a death certificate, to the bank or financial institution.
What Are The Different Types of Joint Account?
Now that we know what a joint account is, let’s take a look at the different types of joint accounts.
Joint Tenancy with Right of Survivorship
The most common type of joint account is called a “joint tenancy with right of survivorship.” This type of account means that if one owner dies, the other owner automatically becomes the sole owner of the account.
Tenancy in Common
Another type of joint account is called a “tenancy in common.” This type of account allows each owner to leave their share of the account to whomever they choose in their will.
What Are The Different Types of Beneficiary?
There are two types of beneficiary:
The primary beneficiary is the first person who will receive the payout from the account.
The contingent beneficiary is only entitled to the money if the primary beneficiary dies before they do.
What Are The Advantages of a Joint Account?
There are a few advantages of having a joint account:
- You can have someone to help you pay bills: This is especially helpful if you are forgetful or tend to spend more than you can afford. Having a joint account means that there is someone else who can help you stay on top of your finances and make sure that your bills are paid on time.
- You can build up your credit score: If you are looking to improve your credit score, then opening a joint account can be a good way to do this. This is because the account will appear on both of your credit reports and so it will help to improve your overall credit history.
What Are The Advantages of a Beneficiary?
There are a few advantages of having a beneficiary:
- The money goes directly to the person you designate without going through probate.
- It can be used to avoid or settle estate taxes.
- You can change your beneficiaries at any time.
- Your assets remain under your control during your lifetime.
What Are The Disadvantages of Joint Account?
There are a few disadvantages of having a joint account:
- You are financially responsible for the other person. This means that if they spend all the money in the account, you are still on the hook for any debts or bills.
- It can be harder to get approved for a loan if you have a joint account. This is because the lender will consider both of your incomes and debts when making a decision.
- You may not be able to access all of the account’s features if you have bad credit. For example, you may only be able to get a debit card instead of a credit card.
What Are The Disadvantages of Beneficiary?
There are a few disadvantages of having a beneficiary:
- Your beneficiary will not have access to the account while you are alive. This means that if you need help paying bills or want someone to handle your finances while you are alive, a beneficiary is not the best option.
- If you die without a will, your beneficiary will not automatically inherit your assets. Your assets will pass through probate and be distributed according to the terms of your will.
- Your beneficiary may not be able to access the account if you become incapacitated. This is because the account is in your name and your beneficiary would need a power of attorney to access it.
So, Which One Should You Use?
Joint accounts are most commonly used when two people are married or in a long-term relationship. This is because joint accounts allow both account holders to have full access to the account and its funds.
However, there are some disadvantages to using a joint account. For example, if one account holder misuses the funds in the account, both account holders will be held responsible.
Beneficiaries, on the other hand, are typically used when one person wants to leave money to another person after they die. The beneficiary designation means that the money in the account will go directly to the beneficiary upon the death of the account holder.
One advantage of using a beneficiary is that it can help to avoid probate. Probate is a legal process that can be expensive and time-consuming.
What Are Some Alternatives to Using a Joint Account or a Beneficiary?
Some alternatives to using a joint account or beneficiary include:
- setting up a trust
- creating a will
- designating someone as a power of attorney
Each option has its own advantages and disadvantages that should be considered before making a decision.
What Are Some Tips For Using a Joint Account?
There are a few things to keep in mind when using a joint account:
First, both parties need to be on the same page about how the account will be used. This means having regular conversations about spending and saving goals, as well as agreeing on a budget.
Second, it’s important to maintain good communication. This means being honest about your spending habits and financial goals and keeping each other updated on any changes.
Finally, it’s important to remember that a joint account is a shared responsibility. This means that both parties are equally responsible for any debts or bills incurred. If one person misuses the account, it can negatively impact the other person’s credit score.
What Are Some Tips For Using a Beneficiary?
When using a beneficiary, there are a few tips to keep in mind.
First, be sure to review the account periodically to ensure that the beneficiary information is up-to-date.
Secondly, make sure that your beneficiaries are aware of their status on the account and understand what they need to do in the event of your death.
Lastly, remember that beneficiary designation can be changed at any time, so if your circumstances change, you can always update your beneficiaries accordingly.