Should coupled clients have joint accounts?

Kelly and her husband Anton* have merged — at least when it comes to their money. The Ontario couple have one joint chequing/savings account. Both partners’ paycheques are automatically deposited to the account, and all bills and household expenses, as well as investments, are drawn from it. The couple also shares a single credit card account and co-own their home as joint tenants.

She and Anton, both 47, started off with their own bank accounts and credit cards, as well as the registered and non-registered investment accounts they’d established before they met. “We made similar amounts of money, and each put the same amount into a joint account to pay the bills.”

When their daughter was born 12 years ago, though, that arrangement changed. “I wasn’t really working, and Anton was still working full-time, and it would’ve been completely imbalanced. And at that point we decided, why not combine everything?”

That’s typical, says estate lawyer Corina Weigl, a partner at Fasken Martineau in Toronto. Separate accounts can work well before a couple has children, or in second or later marriages when the partners are no longer raising children and/or have their own incomes and assets. “But as soon as one spouse stays home — whether that’s to raise kids or take care of an elderly parent or something else — and isn’t earning an income, I don’t know how that model works.”

In terms of their financial arrangements, however, Kelly and Anton may be part of a dying breed. A 2016 poll by the Bank of Montreal found that only 28% of Canadian couples share all their finances. More than a third (37%) keep most or all of their money separate, while the remainder take a hybrid approach: sharing most finances, with some separate accounts.

Read: Income splitting tips for retirees

“I’m not sure there’s a right or wrong when it comes to deciding if a couple should have a joint account,” says Barrie, Ont.-based advisor Allan Norman. It comes down to preferences and money-management styles, he says.

People in first marriages tend to merge finances, says Weigl — unless one partner has significant wealth. In those cases, there’s usually a marriage contract or cohabitation agreement designed to protect that wealth, while the couples’ major assets would be likely kept separate. Spouses in second marriages or common-law relationships, especially when they have children from previous relationships, tend to keep things separate as well. Respondents to the BMO poll who chose separate finances cited ease and maintaining independence as their main reasons for doing so.

That’s the case for Gerald, 64, and Kathleen*, 60, who are moving in together after dating for the last eight years. They plan to keep their investments and day-to-day banking separate. They’ll handle joint expenses the same way they’ve handled travelling and socializing: taking turns picking up the tab. “Maybe I’ll pay the phone bill or maybe she’ll pay the phone bill,” says Gerald, a retired journalist, “but there won’t be any ledger or record book.”

Playing house: Joint tenancy or tenants-in-common?

After dating for close to a decade, Gerald, a retired journalist, and Kathleen, an artist, are moving in together. Kathleen will sell her house in their Northwestern Ontario town and move into Gerald’s, which they’re renovating. Along with picking paint colours and tiles, they need to decide how to share ownership of their space. Kathleen has two adult children from a previous marriage, and she’d like to be able to leave part of her estate to them. But the couple is concerned about protecting Gerald if she dies before him. Is it possible to ensure Gerald isn’t forced to sell the house or take on a mortgage if Kathleen’s share goes to her children?

• Maintaining equity: The couple has gotten creative: they’ve had Gerald’s house appraised. Kathleen will pay for all renovation costs up to the appraised amount, and they’ll split any remaining costs.
• Joint tenancy versus tenants in common: If Kathleen and Gerald become joint homeowners, legally known as joint tenants, when one dies the other automatically assumes sole ownership of the home. This arrangement protects Gerald if Kathleen dies before him: he won’t have to buy out her children’s stake in the home. But it also cuts out the kids from one of Kathleen’s major assets, and she’s not thrilled about that. A common solution, says Weigl, is for the couple to hold the property as tenants in common, each with a 50% share that becomes part of their estate. “Then, they create a contract that stipulates that, according to the terms of Kathleen’s will, the children are obligated to leave their 50% interest in the property in a trust, and that Gerald has the right to live in that property until he dies or decides on his own to sell.” At that point, the kids’ equity goes to them under the terms of Kathleen’s will, and Gerald’s 50% goes to him or his estate. That way, he can stay in his home as long as he’d like, and the kids eventually get their share.

Guided by death and taxes

RRSPs and TFSAs cannot be joint and must be registered to individual owners. If a couple has money to invest beyond these registered accounts, their goals and circumstances — and tax consequences — will dictate the best way forward.

One major benefit to jointly holding nonregistered investments is ease of administration on death, says Weigl: joint ownership facilitates immediate and ongoing access to the account even if one owner dies. A second benefit is avoiding estate administration taxes, or probate: when one partner dies, the assets become the sole property of the other partner, bypassing the estate and therefore probate fees.

Read: How to retire after a mid-50s marriage

At the same time, she notes, commingling accounts can also lead to tax consequences. If one partner transfers a solely owned account into joint ownership, that inter-spousal transfer will trigger income attribution rules. That means all income and capital gains generated from the transferred property will be attributed back to the spouse who transferred them. (The same holds true, she notes, for chequing and savings accounts, although interest earned these days is generally so paltry as to make the rules a non-issue.)

Norman offers a hack for couples who want the clarity of separate investment accounts for attribution purposes, but who also want to avoid probate: establish two joint accounts, with each spouse’s SIN listed first on only one account. Each partner contributes only to the account on which they are listed first. This approach makes it easy to attribute income and gains to the correct spouse, and the accounts are immediately accessible when one partner dies.

A measure of protection

Keeping things separate can also be protective. “If your spouse has poor spending habits, bad credit or joint loans with a past spouse, then use an individual account,” says Norman, who is also a Chartered Financial Divorce Specialist. He remembers a former client whose paycheque went into a joint account with her husband, who owed some money. “The bank swept the account to pay down her husband’s past loan.”

About 15% of respondents to the BMO survey said they wanted to keep things separate in case they split up. Weigl is skeptical of that approach: “If the underlying reason for keeping accounts separate is that you’re worried about your spouse stealing assets, why are you going into the relationship?”

Read: What clients can learn from the Jolie-Pitt split

On the other hand, Weigl often works with clients who are embarking on professional partnerships. “Once they become a partner, they take on liability exposure for negligence claims,” she says. Typically, she says, that professional shift triggers the move from jointly to individually held assets. “As soon as they cross the threshold into partnership, they’ll move certain assets into their spouse’s name in order to protect them from future potential creditor claims.”

Separate accounts are also useful if one spouse receives an inheritance. That money remains the sole property of that spouse as long as it isn’t moved into a joint account or used to pay down joint assets, like the family home.

Joint accounts at end of life

But separate accounts have a drawback: what if one spouse dies? The surviving spouse can be frozen out of the deceased’s account, often until a probated will is produced — a process that can take months. In the meantime, widows or widowers can be without access to funds. That can be particularly damaging if the deceased spouse was the primary breadwinner and the survivor has few, if any, other income sources. In these cases, say both advisors, it’s in the non-income-earning spouse’s interest to have a joint account.

Read: Creative planning for incapacity

That’s not a worry for Kathleen and Gerald, though. “We’ve both had our own homes and we’re used to paying all the bills on our own,” she says. “We’d each be fine without access to the other’s chequing account.”

Norman and his spouse have taken a hybrid approach: they maintain two joint accounts at separate banks, but operate them as though they’re individual accounts. “We know which bills we each pay, but outside of that we don’t know what each other does with his or her money,” he explains. The arrangement respects the couple’s financial autonomy, but would allow each to access the other’s funds immediately in the event of a death.

For day-to-day finances, Norman recommends a hybrid approach. The two most common variations have each partner with an individual chequing account (and, often, credit card) and a joint account from which mortgage payments, bill payments, savings and other household expenses are paid. Either both partners deposit an agreed-upon amount (often proportional to earnings) each month into the joint account, or both paycheques are deposited directly into the joint account and an agreed-upon amount is then transferred to the individual for each person’s discretionary spending.

Automate as many of these transactions as possible, recommends Norman. Any extra account or credit-card fees are likely outweighed by the convenience of an automated system, ease of administration upon death, and an approach that prioritizes both the partnership and each partner’s financial autonomy.

In the end, says Weigl, “how a couple organizes their assets is determined by their goals, and your goals change through the life of a relationship.”

*Names have been changed.