Joint Bank Accounts and Banking Power of Attorney: What's the Difference?

By Jeffery A. Keill CFP,CIM,FMA,FCSI, Senior Wealth Advisor and Portfolio Manager- Keill and Associate Advisory Team

How often has our Wealth Advisory Team had conversation with clients around this confusing topic. The ability to manage ones affairs with autonomy weighs heavily on many Canadians. This is sometimes at odds with the fear of incapacitation of the physical limitations on taking care of daily banking needs. Reasons to consider these tools can be many but most often it is attributed to age, physical mobility, mental ability, mental ability, lack of interest, or possibly someone living remotely or abroad. The decision to use one of these effective tools can be confusing because there are serious legal, tax and family consideration that if mishandled can lead to some serious results. Although often done with the right intent, the results lead to misunderstandings between stakeholders and sometimes with unintended consequences. What was intended to be a cost savings attempt or a simpler way to handle affairs leads to more complexity and higher costs. In this Brief Discussion Paper we will look at what these tools are and how they are very different with respect to handling specifically daily banking and deposit accounts. Of course, this is intended as a broad overview and readers are encouraged to speak to their individual bank, lawyer, or independent Wealth Advisor to gain further insight specific to them.

So how are Bank POA and Joint Accounts similar and yet very different?

A joint bank account and a bank power of attorney (POA) are both financial tool that allow one person to manage or access someone else’s bank account. However, they work in very different ways and offer different levels of control and access and this is where they are vastly different. Lets look at the comparison:

Joint Bank Accounts

A joint bank account is a bank account that is owned by two or more individuals, typically, but not always, giving them equal access and control over the account.

Common Key Features:

• Shared Ownership: All account holders have equal ownership of the account and access to it’s funds.

• Access: Each account holder can deposit, withdraw, transfer funds, and manage the account without needing permission from the other holders. There is generally an ability on some account set ups to require both parties to sign for transactions, but this is rare when the desire is to simplify the affairs of one person.

• Right Upon Death: Upon the death of one account holder, the remaining account holders typically retain full access to the account. This is called “right of  survivorship” in many cases, meaning the account automatically passes to the surviving account holders. You can have the account held in joint tennancy where each portion of the account is owned independently after death. Again, this is not the normal account set up as often the desire to avoid the Estate Administration Tax, more commonly known as Probate Fees.

• Responsibility: All account holders are responsible for the account. If one person withdraws more than their share or overdraws the account, all account holders may be liable for any fees or debts.

Advantages:

• Convenience: Allows multiple people to access and manage the funds without needing to grant specific permissions.

• Emergency Access: In case of illness, death, or incapacity, a joint account ensures continued access to funds.

• Estate Planning: Simplifies the transfer of assets after death, as the account typically passes directly to the surviving account holders.

Disadvantages:

• Risk of Misuse: If one account holder mismanages the account, all owners could be affected.

• Potential for Disputes: Disagreements among joint account holders about how funds should be used or managed.

• Shared Responsibility: All account holders are equally responsible for the account, which could include debts or overdrafts.

• Intermingling of Financial Affairs: As the account is legally owned by both parties, it can create a hardship or problem when one of the parties gets into a legal or financial problem. Events such as marriage breakdown, financial hardship, bankruptcy, can cause unintended problems.

• Bare Trust Rules (CRA): Recent activity from the Canada Revenue Agency as directed by the Government of Canada intends to gather information regarding financial affairs that are arranged in such a matter that they effectively are known as Bare Trusts. Joint Bank Accounts are likely in the near future to have requirements for reporting and this will add a layer of complexity and further costs. (See our Brief Discussion Paper: Beware of the Bare Trust for more information on this subject).

• Bank Power of Attorney (POA): A bank power of attorney (POA) is a legal document that grants one person (called the ‘agent’ or “ attorney-in-fact’) the authority to act on behalf of another person (called the “principal”) in financial matters, such as managing a bank account.

It is important to note that a Bank Power of Attorney is a limited scope POA and that it does not, nor should it be, considered a general Power of Attorney for Property and certainly not a Power of Attorney under Personal Care. It also should not set aside any general POA for Property the individual has prepared previously.

Key Features:

• Limited of General Authority: The scope of the POA can be broad or limited. A bank POA might allow the agent to manage an account, pay bills, or transfer funds, but the authority can be limited to specific actions or a specific time period.

•  The principal can revoke the POA at any time, as long as they are mentally competent.

• Access Control: The agent does not own the account; they only have access to it for the purposes defined in the POA. The principal retains ownership and control.

• Durability: Some POA’S are “durable”. Meaning the agents authority remains in effect even if the principal becomes incapacitated. Others are “springing” meaning the authority only activates under certain conditions.

Advantages:

• Control: The principal maintains ownership of the account and can limit the agent’s powers as needed so long as they continue to have capacity to effect this.

• Flexibility: The principal can define the specific powers granted to the agent, including limiting the duration od the POA or the types of transactions the agent can conduct.

• Incapacity Planning: A POA allows someone to manage an account if the principal becomes incapacitated, without the need for guardianship or court intervention.

Disadvantages:

• Risk of Abuse: The agent has authority to access the principal’s fund, and if the agent is dishonest or unscrupulous, there is potential for financial exploitation.

• Limited Duration or Scope: A POA might not allow the agent to do everything the principal could do, depending on how it’s written. The principal can also revoke or modify it at anytime so long as they maintain capacity to do so.

• Requires Legal Formalities: The document may need to be notarized or witnessed to be legally valid, depending on local laws.

  
  

Conclusion:

• Joint Bank Accounts are best for situations where two or more people need to manage and share the account’s funds equally (e.g., spouses or business partners).

• Bank POA’s are ideal when one person wants to allow another person to manage their finances on their behalf, often used in cases of incapacity, inability, or for specific financial management tasks.

Both have their merits, and the choice between them depends on how much control the account holder wants to retain and specific financial needs. There is no cookie-cutter answer to which is best as every family situation and every financial situation is different. The smallest nuance can make the decision lean one way or the other. We recommend you seek qualified advice on this matter before implementing either strategy. You are welcome to speak to one of our qualified Wealth Advisors to learn more about how these financial tools can help you and your family.

Disclaimer and Notice to Reader:  This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter.   Professional tax and legal advice should be obtained for the readers own personal situation.  For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.