Consider alternative to adding children to your bank account


By Beau Ruff

You’ve likely heard the conventional wisdom many times. Your friends or family, or even at times the bank teller, will counsel you that you should add your child to your bank account. Perhaps it’s a checking account or a savings account, or both. The advice goes something like this: “If you want your children to have access to your money to be able to pay your bills should something happen to you, then you need to add them to your account.”

Beau Ruff, Cornerstone Wealth Strategies

Beau Ruff,
Cornerstone Wealth Strategies

The theory also espouses that without an added name on the account, the account might “freeze” upon your death and no one would be able to access it until a lengthy probate process has concluded. Accordingly, many of us choose to put a child’s name on the account. And, we choose the most responsible child to handle this duty.

This plan is fraught with potential problems. The good news is that a better solution exists.

But first what are the problems with adding a child to your account?

The last will and testament doesn’t apply to the bank account. 

Every bank account (well, let’s say 99 percent of them) are opened with a joint owner as “joint tenancy with right of survivorship.” This means that if one person dies (say, the parent) then the joint owner (say, the child) becomes the sole owner of the assets in the account. This also means that the parent’s last will and testament doesn’t usually work to direct where that money goes. Instead, the entirety of the account legally goes to the joint owner.

Splitting the account among multiple heirs is complicated. 

Let’s assume the money in the joint account is ultimately supposed to be split among several beneficiaries. Let’s further assume the responsible child really will split the money among his or her siblings (and not refuse to split and keep all the money). The potential problem is that the joint tenant child is legally entitled to the funds. So, when that child tries to split the money and transfer to the siblings, there is the potential that it would be a gift subject to the requirement to file a gift tax return.

You might expose your assets to additional creditors. 

The joint ownership structure also can expose the parent’s assets to creditor claims. Imagine that the child named on the bank account causes a car accident and is later sued. The child is technically an owner on the account.  And, the bank account for which the child is an owner might be used to satisfy the creditor’s claim. Bottom line is that the child could subject the parent’s funds to a claim from a third-party creditor.

Estate tax reporting is more complicated. 

From an estate tax perspective, the Internal Revenue Code places an additional burden on accounts held as joint tenants with right of survivorship. That is, the first person to die (let’s assume the child unexpectedly dies first) has to claim all assets held in the account as his or her assets and subject to the potential estate tax, except to the extent that the child’s estate can prove that it wasn’t his or her money. (IRC 2040) This law places the burden on the estate to prove the asset was not owned by, in this case, the child.

The likely solution. 

So, we have a litany of problems that can arise in the areas of gift tax, estate tax, and exposing assets to third-party creditors. Is there a better way?

The power of attorney is the answer. A power of attorney is a legal document that allows the “agent” (in this case, the child) to act on behalf of the “principal” (in this case, the parent). It provides authorization without implied ownership. The distinction between authorization and ownership is important. The parent’s likely goal is to provide simple authorization (and not ownership) in most cases. A power of attorney can be 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. Alternatively, it can also be limited to just apply to specific assets like bank accounts. Either way, the parent gets to choose the type and extent of the authorization.

Two final notes. 

The smaller amount held in any joint tenancy with right of survivorship account, the smaller the potential problems. If a parent has a single child that is supposed to inherit the parent’s estate and there is $1,000 in the account, then in such a situation, the child’s name on the account is not likely to cause any significant harm.

The power of attorney cannot keep the bank account from “freezing” upon the parent’s death. But, this is just not as big of a problem as it seems. If the estate is subject to a probate, you can typically unfreeze the account in a matter of days (if you are in hurry) or weeks (in the normal course of events).

[panel title=”About Beau Ruff:” style=”info”]
Attorney Beau Ruff works for Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick, where he focuses on assisting clients with comprehensive planning.

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