A Closer Look at Power of Attorneys vs Joint Accounts

July 12, 2023

Many Canadians worry about how their finances will continue if they are unable to manage everything themselves due to physical limitations, mental incapacities or because of geographic distance. Power of Attorneys and joint bank accounts are ways to allow others to access your monies and handle your everyday banking. Both have benefits and risks that must be carefully considered before putting either in place.

What is a Power-of-Attorney (POA)?

A POA is a legal document where you appoint an individual to manage your finances and property on your behalf. They do not become an owner of any of your assets and only have the authority to manage your finances in your best interests and as you would normally do for yourself.

What is a Joint Account?

Bank and investment accounts become joint when two or more individuals have ownership over the same account. All individuals have identical access to the monies in the account and equal responsibility for the transactions including deposits and withdrawals, without monitoring where the funds originated from. All joint holders are accountable for tax reporting on interest income, dividend payments and capital gains growth.

Benefits of a POA

A POA is a legal document that makes it very clear who you wish to manage your finances if you are unable to do it for yourself. You can select anyone you wish to be your POA, including a spouse, adult child or close friend. There is flexibility to have the POA cease upon your mental impairment or continue if you are deemed mentally incapacitated. The individual named as POA does not take ownership of any of the assets and if there is a question about the handling of the assets, your POA may be legally required to provide explanations for certain decisions or actions taken.

Risks of a POA

A POA document does not typically prescribe or clearly lay out how to handle each distinct situation that may arise. Instead the role is responsible for managing the accounts and assets in the “best interests” of the individual. There are risks that the POA may make decisions that the individual may not have made if they were still in charge of their own finances or there could be risk of financial abuse. A POA document must be reviewed regularly to ensure it meets your current needs and requirements of the law.

Benefits of a Joint Account

The most common use of a joint bank account is between spouses to pool monies together to pay for joint expenses. In the event that a joint holder passes away and the account is joint with the right of survivorship, the surviving holder receives the full balance of the account. This allows for easy access to the funds and the ability to continue the managing of finances.

Risks of a Joint Account

All joint account holders have equal access to funds in the account regardless of the origin of the funds or any ‘good faith’ agreement between the account holders about the purpose for the monies and how it should be managed. Some examples of situations and associated risks that could arise include:

• a marital breakdown, separation or divorce of one of the joint account holders could result in the funds in the account being claimed by the former spouse.

• a financial downturn experienced by a joint account holder resulting in creditors attempting to regain monies owed or claims of bankruptcy with funds in the joint account at risk for use in repayment.

• taxation of interest income, dividend payments or capital gains could become an issue and ‘messy’ as to who claims the growth.

• an account registered as joint with right of survivorship means that in the event of the passing of one of the joint account holders, the other holders will receive the funds immediately without having them flow through the Will. This could raise questions of estate division of assets and create a family dispute, especially if an elderly parent makes one of their children joint and there are additional siblings.

Whether you are contemplating who to designate as your POA or you wish to make your account joint, one of the main considerations is the trustworthiness of the individual you are considering. Do they understand your wishes and will they follow your instructions especially if you become mentally incompetent? Some steps to take in making these important decisions include educating yourself on all the benefits and risks associated with each option, talking to your financial advisor and seeking out independent legal advice to ensure the best choice is made for your particular circumstances.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

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