It is fairly common for an aging parent to add a child’s name (sometimes more than one child) as a joint owner on the parent’s bank accounts. The arrangement is usually viewed as a simple and inexpensive solution to the following concerns:
- Someone needs to be able to pay bills when the parent is ill or hospitalized;
- Funerals are expensive and money will be needed immediately;
- The account will otherwise go to probate upon the parent’s death;
- Probate is expensive and time consuming; and
- Estate planning involves costly attorneys and fancy legal documents.
Many people are not aware of the hidden problems and risks that come with this arrangement. What seems like a practical and inexpensive solution may actually create financial complications and ignite family conflicts. Here are some reasons NOT to add a child’s name to a bank account:
- Loss of control – Adding a joint owner means the parent loses sole control of the account. Some parents are shocked to discover they are unable to remove the child’s name from the account without the child’s consent. This is a problem if the relationship sours or the child uses the money in a way the parent doesn’t like.
- Invitation to child’s creditors – Adding a child to an account gives the child ownership, not just access. Because the child has ownership, anyone to whom the child owes money (IRS, divorcing spouses, judgement creditors, and more) may be able to claim the funds in the account.
- No backup plan – If the joint owner child is ill or dies before the parent, there is no one else authorized to access the account. And adding more names to the account is not a wise decision for all the other reasons discussed.
- Accidental disinheritance – The trusted child may be expected to share the money with other family members according to the parent’s wishes after the parent’s death. If the parent’s wishes are not expressed in a will, then the child may claim the account and not follow those instructions. Also, if the child dies shortly after the parent, then the account will pass to the child, become part of the child’s personal estate, and then be distributed to the child’s own family.
- Ignites family feuds – Other children and family members usually look suspiciously at the child who is joint on an account with the parent. There may be suspicions the child used the money personally, moved money to other accounts, or did not accurately report how much was in the account. This may lead to fights in court or broken family relationships.
Fortunately, there are alternatives to joint ownership. Many of the aging parent’s concerns can be solved with carefully designed powers of attorney (POAs). These allow a trusted child to access the account without the risks that come with joint ownership. Also, POAs identify alternates to replace the child and may require accountability and restrict what the child can do with the money. Transfer on death designations can be used to make sure an account is distributed appropriately to other family members. A revocable trust may also be a useful tool. An estate planning attorney should be consulted about which of these tools are best for the aging parent’s situation. Most estate planners are reasonably priced and may well save the family from expensive legal fights in the future.
Norman E. Richards (Gene) is an attorney at the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on estate planning and elder law. He assists clients with the development of customized estate plans to address their specific needs, including family owned businesses, senior adults concerned about long term care needs, and special needs trusts for children with special needs. He may be reached at (734) 261-2400 or firstname.lastname@example.org.