Why You Shouldn’t Add The Kids to Your Bank Accounts

As people get older, they sometimes want help handling their finances–even down to the point of writing the checks and making sure the bills get paid. One way that people go about doing that is to add someone (usually a child or perhaps a caregiver) as a co-owner of a bank account. Last week, I said that’s generally a bad idea. This week, I’m going to explain why, and suggest how we might do better.

What could go wrong?

First, you can lose control of your money. When you add a new owner to an account, that person has just as much ownership of the account as you do. Most of the time, there’s an implied agreement that the person you added won’t make off with the money. Unfortunately, not everyone holds up his or her end of the bargain.

Second, you could get hit with a gift tax. For 2015, an individual can give up to $14,000 to another person without incurring the gift tax. If you give another person ownership of your account, they’re getting value from you without giving you equal value in return, and that (with a few exceptions) is a gift for tax purposes. Generally, the donor–not the recipient–is the one on the hook for the tax bill. Unfortunately, the intent (or lack thereof) to give a gift doesn’t matter in deciding if a gift was made, so the fact that you didn’t intend to give away anything isn’t likely to help.

Third, you might mess up your estate planning. Let’s say that Mary Smith (a clever pseudonym, I know) has two daughters, Jane and Amy. Mary decides to add Jane as a co-owner on her checking account. Mary intends for Jane and Amy to share her estate equally. When Mary dies, Jane will probably get the entire account (it could be less, depending on the type of joint tenancy, but Amy’s not getting half). This might work, if Mary’s planned for it elsewhere in her estate, but if not, it might cause an imbalance in the estate and unrest between the sisters.

What are the alternatives?

Adding an authorized signer. A bank may allow you to name someone else who is authorized to sign checks on your behalf. Authorized signers do not own your account–they’re just allowed to sign checks on your behalf. There’s still a chance of misappropriation, so you should still be reviewing bank statements and keeping track of what’s going on, but the authorized signer does not own anything in the account.

Granting power in a durable power of attorney. A durable power of attorney, as we discussed last week, provides another person with the ability to act on your behalf. There’s still a chance of abuse (and we talked about how to reduce that risk last week too), but an agent in a power of attorney doesn’t have ownership of any of your property.

Using TOD and POD registrations to pass the account. Sometimes, people add their kids to their bank account as a probate avoidance tool. I understand how it seems like a simple solution, but it still comes with the problems I discussed earlier. If all you’re worried about is passing the account outside of probate, see about establishing a TOD (“transfer on death”) or POD (“payable on death”) designation to the account. Using a TOD or POD, you can name others to be beneficiaries of the account. They don’t get the account until you die, and the account would still stay out of probate.

Placing the account in a revocable living trust. Another way of keeping property out of probate is to place it in a revocable living trust. As long as you’re able, you can remain in control of the trust (by serving as the “trustee”) if you want. If you later become incapacitated, a substitute trustee can take over (you can–and should–name at least one backup in your trust) and handle things on your behalf. You can also do some extra planning with a revocable living trust, such as delaying distributions until beneficiaries reach certain ages. Again, you don’t give away ownership and control of the assets too early, and you get to avoid probate.

No particular alternative is right for everyone, but adding people to your bank and investment account registrations for estate planning reasons is almost always a bad option. If you’re considering doing that, stop and check to make sure there’s not a better way.

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