The conversation may concern a checking or savings account or both. Unsolicited advice usually goes something like this: “If you want to have your children be able to pay your bills if something happens to you, you need to add them to the account.” While the intentions are good, a recent Spokane Journal of Business article advises otherwise: “Adding adult children to accounts can be problematic.”
People are made to worry even more when they are told that if there is no second name on the account, it will be frozen upon death, and no one can access it until a lengthy and costly probate process has occurred.
To do the right thing, many people respond by adding their most responsible adult child to the account. They don’t realize they are creating more problems than they are solving. A better solution exists, and it should be something taken care of when preparing or revising your estate plan.
Why wouldn’t you want to add an adult child to your accounts? Simply put, your Last Will and Testament doesn’t apply to a bank account if it is a joint account. Most bank accounts are owned with a “joint tenancy with right of survivorship.” This means if the primary owner, the parent, should die, the adult child becomes the sole owner of assets in the account, regardless of what your Will says.
Assuming that your intention is to split the assets in the account among several beneficiaries, this may or may not happen. The new account owner is under no legal obligation to share the assets, as they are solely and legally entitled to these funds.
Another problem: If the child decides to split the funds and transfer them to siblings, the IRS may see this as a gift subject to the requirement to fill out a gift tax return.
By having a joint owner, you may also expose these assets to creditor claims. What if the child named on the bank account causes a car accident and is sued? Those assets are considered owned by the child and could be attached by a creditor. If your child gets divorced, those assets may also be part of a divorce settlement.
Another problem: If the joint owner dies before the parent, the parent may have to pay inheritance tax on their own funds.
The IRS and potentially your state of residence places an additional burden on accounts held as joint tenants with the right of survivorship. If the child unexpectedly dies first, the law places the burden on the estate to prove the child did not own the asset.
Is there a solution? Yes, a Financial Power of Attorney.
A Financial Power of Attorney is a legal document appointing an Agent to act on behalf of the parent, providing authorization without ownership. The parent’s goal is almost always to provide authorization and access but not ownership.
The Financial Power of Attorney is generally 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.
Your estate planning attorney can create a Financial Power of Attorney appointing an Agent to give them as much or as little control as you want. You’ll be able to determine precisely what you do and do not wish your Agent to do.
Reference: Spokane Journal of Business (Nov. 9, 2023) “Adding adult children to accounts can be problematic”
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