You’ve likely heard your friends or family—or even the bank teller, at times—counsel you to add an adult child to your bank account.
Perhaps it’s a checking account or a savings account or both. The advice goes something like, “If you want your children to have access to your money to be able to pay your bills should something happen to you, then you need to add them to your account.”
The theory also espouses that without an added name on the account, the account might freeze upon your death, and no one would be able to access it until a lengthy probate process has concluded.
Accordingly, many of us choose to put a child’s name on the account. And we choose the most responsible child to handle that duty.
This plan is fraught with potential problems, but the good news is that a better solution exists.
First, what are the problems with adding a child to your account?
The last will and testament doesn’t apply to the bank account.
Every joint bank account—well, let’s say 99% of them—is opened with a “joint tenancy with right of survivorship.” This means that if one person dies, such as the parent, then the joint owner, such as the adult child, becomes the sole owner of the assets in the account. This also means that a parent’s last will and testament doesn’t usually work to direct where that money goes. Instead, the entirety of the account legally goes to the joint owner.
Splitting the account among multiple heirs is complicated.
Let’s assume the money in the joint account is ultimately supposed to be split among several beneficiaries. Let’s further assume the responsible child will split the money among siblings—and not keep it all. The potential problem is that the joint-tenant child is legally entitled to the funds. So, when that child tries to split the funds and transfer to the siblings, there is the potential that it would be a gift subject to the requirement to file a gift tax return.
You might expose your assets to additional creditors.
The joint ownership structure also can expose a parent’s assets to creditor claims. Imagine that the child named on the bank account causes a car accident and is later sued. The child is technically an owner on the account, and the bank account for which the child is an owner might be used to satisfy the creditor’s claim. Bottom line is that the child could subject the parent’s funds to a claim from a third-party creditor.
Estate tax reporting is more complicated.
From an estate tax perspective, the Internal Revenue Code places an additional burden on accounts held as joint tenants with right of survivorship. Let’s assume the child unexpectedly dies first; the law places the burden on the estate to prove the asset was not owned by the child.
So we have a litany of problems that can arise in the areas of gift tax, estate tax, and exposing assets to third-party creditors. Is there a better way?
The power of attorney is the answer.
A power of attorney is a legal document that allows an agent to act on behalf of the parent. It provides authorization without implied ownership. The distinction between authorization and ownership is important. The parent’s likely goal is to provide simple authorization and not ownership in most cases.
A power of attorney can be made effective immediately upon signing to allow the child immediate access to the account for bill-paying. It can apply not only to bank accounts but to all assets. Alternatively, it can also be limited to apply to specific assets like bank accounts. Either way, the parent gets to choose the type and extent of the authorization.
The smaller the amount held in any joint tenancy with right of survivorship account, the smaller the potential problems. If a parent has a single child that is supposed to inherit the parent’s estate and there is $1,000 in the account, then in such a situation, the child’s name on the account is not likely to cause any significant harm.
The power of attorney can’t keep the bank account from freezing upon the parent’s death. But this is just not as big of a problem as it seems. If the estate is subject to probate, you can typically unfreeze the account in a matter of days if you are in hurry, or weeks in the normal course of events.
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