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Should You Add Your Child to Your Bank Account?

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Joint accounts may seem like an effective way to prepare if parents need help with finances as they get older, but unexpected problems could crop up.

Should you add your child to your bank account? That’s a common question seniors ponder, in case something unexpected should occur and someone needs to access that account. “Sounds like a good idea on the surface”, states Caroline Daiker, attorney with Beck, Lenox & Stolzer Estate Planning and Elder Law. However, making a child joint owner of a bank account, investment account or even a safe deposit box, can have unintended consequences. Here’s a good article on the subject from Kiplinger, “Joint Account With Rights of Survivorship and Alternatives Explained.”

Most couple’s bank accounts are set up by default as “Joint With Rights of Survivorship” or JWROS, automatically. Assets transfer to the surviving owner upon the death of the first spouse. This can lead to several problems. If the intent was for remaining assets not spent during a crisis to be distributed via the terms of a will, this will not happen. The assets will transfer to the surviving owner, regardless of directions in the will.

Adding anyone other than a spouse could also trigger a federal gift tax issue. For example, in 2023, anyone can gift up to $17,000 per year tax-free to anyone they want. However, if the gift exceeds $17,000 and the beneficiary is not a spouse, the recipient may need to file a gift tax return.

If a parent adds a child to a savings account and the child predeceases the parent, a portion of the account value could be includable in the child’s estate for state inheritance/estate tax purposes. The assets would transfer back to the parents, and depending upon the deceased’s state of residence, the estate could be levied on as much as 50% or more of the account value.

There are alternatives if the goal of adding a joint owner to an account is to give them access to assets upon death. For example, most financial institutions allow accounts to be structured as “Transfer on Death” or TOD. This adds beneficiaries to the account with several benefits.

Nothing happens with a TOD if the beneficiary dies before the account owner. The potential for state inheritance tax on any portion of the account value is avoided.

When the account owner dies, the beneficiary needs only to supply a death certificate to gain access to the account. Because assets transfer to a named beneficiary, the account is not part of the probate estate, since named beneficiaries always supersede a will.

Setting up an account as a TOD doesn’t give any access to the beneficiary until the death of the owner. This avoids the transfer of assets being considered a gift, eliminating the potential federal gift tax issue.

Planning for incapacity includes more than TOD accounts. All adults should have a Financial Power of Attorney, which allows one or more individuals to perform financial transactions on their behalf in case of incapacity. This is a better alternative than retitling accounts.

Retirement accounts cannot have any joint ownership. This includes IRAs, 401(k)s, annuities, and similar accounts.

Power of attorney documents should be prepared to suit each individual situation. In some cases, parents want adult children to be able to make real estate decisions and access financial accounts. Others only want children to manage money and not get involved in the sale of their home while they are incapacitated. A custom-designed Power of Attorney allows as much or as little control as desired.

Your estate planning attorney can help you plan for incapacity and for passing assets upon your passing. It may be a long time before anything unexpected occurs, however, it’s best to plan proactively.  If you are in need of an attorney, Beck, Lenox & Stolzer would be happy to assist you with questions like, “Should you add your child to your bank account?” Clicking here will allow you to schedule a free phone call with one of our attorneys to discuss your needs.

Reference: Kiplinger (March 30, 2023) “Joint Account With Rights of Survivorship and Alternatives Explained”

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