BY JUSTIN BANFORD
I have often heard from people assisting elderly parents that an easy way to avoid probate and to enable the child to assist the parents in managing their finances is to add the child to the parents’ bank account. I have even heard that the child should be added to the deed of the parents’ home. This is often called the “Poor Man’s Will.” The logic is that the parents may lose their capacity and need the child to pay their bills, and this the child will have access to the money and not have to endure the hassle of probate after the parents are gone. The purported plan is that the parent will give the child a letter of instruction of what to do with the money after the parent passes in the expectation that the child will follow the parents’ wishes. This scheme may in fact avoid probate and in some instance may even work, but it can never be recommended for the following reasons:
Change of Ownership. Adding a joint owner fundamentally changes the ownership of the property. The property goes from being owned by the parent an individual (or husband and wife if already jointly owned) to being owned by the parent and the child. The child, as an owner of the account, has full authority to withdraw the entire balance at his discretion. Each person on a joint bank account is legally considered a full owner when it comes to withdrawing money from the account. Therefore, adding the child to your account you create a new risk the risk of the child misappropriating the money for his own purposes. Despite good intentions this is more common then you may think. It is a very easy lap in logic for the child caring of his elderly parents, while is siblings are not pitching in, to believe he entitled t a little compensation and coverage for his “expenses”. He is correct, however, in that as a joint owner of the account, he is legally entitled to withdraw part or all of the funds for any purpose.
Creditor Issues. A joint account is a asset of both parties. One’s assets are always susceptible to the claims of one’s creditors. In property law assets titled to a husband and wife are owned as “Tenants by the Entirety” and are protected from the creditors of just one of the owners; but, joint assets, assets owned by two people other than a husband and wife, are not afforded the same creditor protections. So if your child has a judgment against him, the creditor may garnish the entire bank account, regardless whether the parent was involved in the creditor’s underlying claim.
Divorce of Legal Issues. Not to be cynical, but ex-spouses are creditors and current spouses are potential creditors. The same concerns above regarding creditors apply in divorce. A child’s joint account with his parent is an asset of the child, and a divorcing spouse may be legally entitled to a portion of the joint bank account funds. As I’m told, nothing is beyond the pale in divorce.
Bypassing the Will. Aside from fundamentally changing the ownership of the property, and the resulting creditor issues, the other considerable problem with adding a child as a joint owner of your assets is that many joint assets (e.g., bank accounts, real estate, car titles) bypass the provisions of your will. Your will does not govern joint accounts or any asset registered jointly with rights of survivorship. Therefore, your wishes as written in your will or trust will not be honored, frustrating your estate planning goals. Clearly, this might not be a problem if the child is the sole intended beneficiary of the last parent’s estate, but that is not always the case. If you have multiple children and one child becomes the sole owner of an asset following your passing by reason of survivorship, that child is now the sole legal owner and does not have a legal obligation to include his siblings in the inheritance. This has the potential to create a major, lifelong feud among your children.
Gift Taxes. Most people do not consider gift tax issues. Adding a child to a parent’s bank account is indirectly making a gift, which may or may not be subject to gift tax for the parents. Depending on the size of your estate and the current gift/estate tax exclusion amounts, this could create a tax problem and, frustrate the estate planning goals you had in place.
What should you do? A simple, but better, solution is to give your child signature authority on your checking account to allow him to handle your bills. Please note, however, that many bank officers dislike the signature authority law (because the child will not be listed on the checks) and prefer to just have you add the child as joint owner for the banks convenience. Push back on the suggestions because what’s best for you, not the bank, is what matters. Signature authority is the better, but proper estate planning is best. For example, in the case of an elderly widow, our usual advice would be to transfer all of her assets to a living trust with a trusted child or children as the successor trustee. Since the assets are owned by her, there is no need to go through probate, and the successor trustees can jump in to manage her assets she should lose capacity.