Why “putting your child on” your bank accounts probably isn’t the best plan

By Tracy Nolan – Trusts & Estates Attorney

When planning for the future, we all need to anticipate those times in life when we may need some assistance to handle our financial affairs.  At Lyons Gaddis, our estate planning attorneys assist clients not only with the plan to transfer assets upon death, but also with the plan to handle emergencies, eventual forgetfulness or other factors of aging during our client’s lives.

One common strategy that people often consider is opening a multiparty bank account with an adult child as joint owner of the account. While this approach might seem convenient, it comes with several risks and drawbacks that can lead to unintended consequences.

The Risks of Multiparty Bank Accounts

1. Legal Ownership and Control Issues: When you open a joint bank account with your adult child, they become a co-owner of the account with the same rights of ownership as you. This means they have equal access to the funds and can make withdrawals or decisions without your consent. If your child encounters financial problems, such as debt or bankruptcy, creditors can potentially access the funds in the account to satisfy their claims. Moreover, there is a chance that the assets could be considered marital assets of that child, subject to division in a divorce proceeding. In addition, if you have a change of heart, and no longer wish to share the account with your child, it may be difficult and inconvenient to remove them.
2. Inheritance Complications: Upon your death, the funds in a joint account typically pass directly to the surviving co-owner, effectively bypassing the terms of your will. That is, the funds in this joint account will not be part of your estate that would otherwise be distributed to your other heirs. This can lead to disputes among your heirs, especially if the joint account was intended merely for convenience and not as a gift. Other beneficiaries might feel cheated, leading to familial discord. Your child who is a co-owner may voluntarily include the joint account in your estate after your death, but it requires additional steps. If the surviving co-owner considers the account to be their own upon your death, disputes may result.
3. Tax Consequences: Adding a child to your account could be interpreted by the IRS as a gift for tax purposes if the child takes the money for their own use, potentially triggering gift tax implications if the amount exceeds the annual exclusion limit. Additionally, any income generated by the account could be taxed at the child’s tax rate, which might be higher than yours.

While in some circumstances, adding a child as a joint account owner might make sense, a more prudent alternative is appointing that trusted child as an agent with a durable power of attorney and giving that agent authorization to sign on your account. This method provides greater protection and flexibility for both the parent and the child.

Advantages of a Durable Power of Attorney

1. Retained Ownership and Control: By appointing an agent under a durable POA, you retain ownership and control over your bank account during your lifetime. The agent has the authority to manage your finances according to your instructions but does not become a co-owner. This prevents your funds from being exposed to the agent’s financial liabilities or personal legal issues.
2. Clear Estate Distribution: Using a POA allows your assets to be distributed according to the terms of your will or trust. This approach minimizes the risk of disputes among your heirs and ensures that your estate plan is executed as intended.
3. Flexibility and Revocability: A durable POA can be customized to suit your specific needs and preferences. You can outline exactly what powers the agent has and under what circumstances they can act. Additionally, you can revoke the POA at any time, so long as you are not incapacitated.
4. Protection Against Incapacity: A durable POA remains effective even if you become incapacitated, ensuring continuous management of your financial affairs without the need for court intervention.
5. Appointed Agents have Fiduciary Duties: As a fiduciary,the agent has the legal duty to act in good faith, with care, competence, and diligence. The agent must act in accordance with your best interests, not the agent’s interests.

While opening a multiparty bank account with an adult child might seem like a straightforward solution for managing your finances, it often leads to complications that can outweigh the benefits. Instead, appointing an agent with a durable power of attorney and authorizing them to serve as an authorized signer on your account provides a more secure and flexible arrangement. This strategy ensures that your financial affairs are managed according to your wishes, protects your assets from potential risks, and facilitates a smoother estate planning process.

Tracy Nolan is an attorney in the Trusts and Estates practice group at Lyons Gaddis P.C.  She tailors a client’s estate plan with the appropriate tools to smoothly transfer all aspects of clients’ estates, regardless of the complexity of the client’s circumstances.  She assists clients with a holistic plan for a variety of assets, consisting of business interests, real estate, water and mineral rights, financial investments, and retirement funds.

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