Creating a joint bank account between parents and their adult children may seem like a simple way to allow the adult child to write checks on behalf of their parent, or plan to avoid probate upon the passing of the parent.
While it may seem like a simple solution on the surface, it can create problems for both the parents and their children.
Here is a hypothetical example of why this is not a good idea. Mary, age 65 and mother of 2 adult children is a widow. She decides to add her 35-year-old son, Jack, to a $250,000 bank account that was previously only in her name. Mary does not add her daughter, Sarah to the account, since Jack is more organized and more available to write checks and keep her bills in order while she is in Florida for the winter.
Even if Jack is as responsible as he always has been, there can be some unintended consequences that Mary could encounter by adding his name to her bank account.
Shared Liabilities: By adding Jack to the account, the money becomes his and is considered as an asset in his estate. If Jack were to run into some issue with a creditor, the entire amount of the account could be at risk even though his mother Mary was not involved in any way with his credit problems.
Divorce: Jack has separated from his wife and they are likely to divorce. His wife is now entitled to a portion of this jointly held account when their assets are divided up.
Ownership: With Jack’s name on the account, he does not need permission to withdraw funds at any time for his own use, and he is not required to pay it back. He decides he really needs an addition on his home and plans to pay it back sometime in the future.
Legal Judgments: If Jack accidentally rear-ends a school bus and becomes involved in a lawsuit, subsequent claims and judgments involving money includes Mary’s account as part of Jack’s assets. The entire $250,000 could go to the plaintiff.
College Aid: If Jack keeps the account until he has a college-aged child of his own, that child is less likely to get good student aid or scholarships because the joint account with Mary inflates Jack’s assets.
Estate Implications: Mary has a Will that clearly states she wants to divide all her assets equally between her two children Jack, and Sarah. If Mary dies unexpectedly after Jack’s name is added to her bank account, this rights-of-survivorship joint account bypasses her Will entirely. The money in the account will remain Jacks despite Mary’s original intent.
Gift Taxes: By adding Jack’s name to the account it gives him rights of survivorship, which means that Jack is entitled to all the same rights and responsibilities as Mary. While Mary may not have intended to make this account a gift to Jack, the IRS doesn’t agree. This may require Mary to file forms with the IRS to alert them to her gift to Jack. This year, you can give up to $14,000 to another person without paying gift taxes or notifying the IRS.
Adding a child’s name to your bank account is an example of a well-intentioned gesture that triggers unexpected negative consequences.
In seemingly simple situations like these, it is well worth consulting an Estate planning attorney before making and executing such decisions.
For more information on any of the topics above, please contact The Heritage Law Center at mkarr@maheritagelawcenter.com or 617.299.6976.
