If you’re dealing with health issues, thinking of taking a risky adventure, or just getting older, you might start thinking about the best way to make sure someone pays your bills if you become unable to. But before you add your adult child’s name to your bank account, consider this much better alternative: don’t.
No matter how responsible, dependable, and lovable your adult child may be, the answer to this question remains the same: don’t add your child to your bank account. Below are the reasons why.
Your Money Will Be Exposed to Your Child’s Creditors, Divorce, and other Liabilities
As soon as you add your child as a joint owner of your bank account, the money in the account becomes just as much your child’s money as it is yours. That means your child—let’s call him Johnny—could go on a spending spree and wipe the account clean, with no obligation to pay you back. More likely, Johnny may face his own financial difficulty and “borrow” from the account with the intention to pay it back, but never quite find the funds to do so. And if he makes withdrawals of more than $15,000, the IRS may consider it a “gift,” and you may be required to file a gift tax return.
Even if your beloved Johnny would never do such things, the money is still vulnerable to anyone he might owe money to, from a person who wins a judgment (by filing and winning a lawsuit) against him to Johnny’s wife if they eventually divorce. This is true even if you had no involvement in the lawsuit, divorce, or other debt.
It Could Throw Off Your Estate Plan
If your will dictates that your assets be divided equally between multiple individuals—for example, Johnny and his two siblings—adding one child’s name to your bank account could throw off that balance. That’s because, assuming you and Johnny are now joint owners with the right of survivorship (which is generally the case with joint bank accounts), the account will become solely his when you pass away; it won’t pass through your will. That means Johnny will get his share through your will, plus whatever was in the account. And while you might expect Johnny to share, he may assume you intended for him to have the entire account (in light of all the help he gave you in managing your finances). If he does decide to share, depending on the value of the account, there may again be gift tax consequences.
It Could Affect Your Ability to Qualify for Medicaid
If you end up needing nursing home care and filing a Medicaid application for help paying the costs, Medicaid may view your adding Johnny to your account as a transfer and may impose a penalty.
It Could Affect Your Grandchild’s College Aid
If Johnny has a college-aged child, that child may be less likely to get financial aid or scholarships because your account has inflated Johnny’s assets.
What To Do Instead
You have several options for enabling your adult child to help you manage your finances without exposing yourself to the vulnerabilities listed above. You can ask your estate planning attorney to draft a Durable Power of Attorney or Revocable Living Trust. (To learn more about these and other estate planning documents, check out this article.) Your bank may also allow you to give your child a simple signature authority over your account, which does not give him/her any ownership interest in the account but allows him/her to conduct transactions on your behalf. If you choose the latter option, check behind your bank and make sure they made the right designation, rather than adding your child as a “co-owner,” “joint owner with right of survivorship,” or “pay on death beneficiary.” Also know that your bank won’t monitor to make sure Johnny isn’t using the funds for his own purposes, but if he does, you’ll have a legal claim against him.
If you have any questions, please post a comment below or send me a message here.