In an interesting recent article “Your Clients and Their Children: The Problems With Joint Bank Accounts” by Andrew Rice there is a recurring question that pops up during elder and estate planning: should I add my child to my bank account? When a senior begins to lose their ability to manage their finances like paying the bills, these accounts can seem like a viable option. However, the article outlines five risks that both the parent and child should consider:
1. Withdrawal Rights: Each person on a joint bank account is legally considered a full owner when it comes to withdrawing money from the account. This means the child can fully deplete the bank account at any point in time should they choose to do so.
2. Creditor Issues: The bank account becomes an asset for both parties on the account. If the child should get into financial difficulties and has a creditor with a judgment against them, the creditor could legally garnish the entire bank account regardless of the parent’s involvement.
3. Divorce and Legal Issues: As noted above, the account becomes an asset of the child; therefore, it is also subject to potential claims by a divorcing spouse of the child or a lawsuit/judgment against the child.
4. Bypassing the Will: Joint bank accounts bypass the will of a deceased person, and the will does not impact the money in a joint bank account. This could create a dispute among other beneficiaries as the child on the joint account would get the entire proceeds from the account after the parent’s death, whether or not other assets stipulated in the will were to be divided equally.
5. Gift Taxes: adding a child to a parent’s bank account is indirectly making a gift, which may or may not be subject to gift tax for the parents.
One alternative to a joint bank account is a type of account commonly referred to as a “convenience account.” Certain states allow these accounts, which let others have access to the account and make deposits and withdrawals. The account legally obliges the helper to act as the elder’s agent, and any money in the account becomes part of the elder’s estate, to be divided in accordance with a will or the law. If there is a need for someone to provide this type of assistance to an elderly person and the children are not a viable option, your trusted accountant can always provide this service as well.