There is a long running joke about lawyers never giving straight answers. We prefer to give clients definitive answers but when clients ask us whether to add a child as a joint account holder, we always say, “it depends.” Adding your child as a co-owner on your bank account can be positive or negative depending on your intent and the situation.
A common reason to add an individual as a co-owner on an account is to avoid court involvement at death. Whether someone passes away with or without a Will, any assets titled in their sole name without a named beneficiary must go through the courts. This court process is called Probate if there is a Will and Administration if someone passes without a Will. Many people justifiably want to avoid this onerous court process and adding a joint owner on an account seems a simple solution.
Assisting with Finances
Another reason parents add a child as joint owner is so the child can assist with day-to-day finances. This makes sense if incapacity is a looming possibility or when a parent enters the hospital or a nursing home. Financial scams aimed at seniors are rampant and the help of an adult child can avoid these traps.
Sure, this method of avoiding probate dispenses with the need for a lawyer and doesn’t cost any money. Such ready access to funds at death can cover the costs of a funeral for example. But as with many things in life, simpler is not always better. Adding a child as a joint account holder does not fit every family circumstance and can have unforeseen consequences.
Assets Pass to the Joint Account Holder
A joint account holder trumps a named beneficiary and Last Will & Testament. At death the account will pass directly to the joint owner by rights of survivorship. This may work when there is only one child and the parent wants that child to inherit 100% of the account. This is less ideal when there are multiple children or grandchildren.
Many times, a parent puts a child as joint account holder just to avoid probate. Or for convenience’s sake so that the child can help with finances after an illness. But what if they did not intend for the account to pass the one child? A joint account can thwart an otherwise sound estate plan when an account was supposed to pass to multiple beneficiaries at death. Worse still is if the account contains significant assets or is the sole asset. In such circumstances the remaining children do not inherit anything.
Risk of Creditors & Divorce
It is also important to understand that a joint owner has the same rights as an account holder – and the same risks. A joint account holder can access the account and withdraw 100% of the funds. This leaves the assets open to a child’s bad judgment. Even when a child can be trusted completely, the account is subject to their creditors. A sudden lawsuit or a divorce opens the account up to risk.
Financial institutions may offer superior options that also avoid the court process. A combination of the following may take a little more time and effort, but can solve some of the above problems:
1. Transfer on Death. Some banks allow an account holder to name “transfer on death beneficiaries” to certain accounts. This avoids probate but does not allow children or their creditors to have ready access to the account funds.
2. Power of Attorney. A child can be added as an agent under a power of attorney to assist with finances during a parent’s lifetime.
3. Convenience Accounts. Some institutions allow account holders to create a convenience account that names a child as a signor, with no ownership or transfer on death rights.
A revocable living trust avoids the court process. A grantor controls all the trust assets during their lifetime. If they become incapacitated, the chosen successor trustee can control the assets for the grantor’s benefit. This gives the adult child control without subjecting the assets to their creditors. Upon the grantor’s death the trustee must follow the directions as laid out in the trust. The assets pass to beneficiaries without court intervention and without accidental disinheritance. Trusts avoid most legal challenges as they are much harder to contest than a Will.
As Albert Einstein said, everything should be as simple as it can be but not simpler!
Whether a joint account with a child is beneficial depends not only on what a client is trying to accomplish, but on how it fits with the rest of the estate plan. If a client’s estate is simple, they have only one child, and are confident giving their child unlimited access to funds, then the risk may be worth it. Sometimes we advise adding the named Executor as a joint account holder so the Executor has ready access to cash. But when we do so, it is only one piece in the larger estate plan we create with a client. A good estate planning attorney is always mindful of how each piece fits together. The way each of your assets pass at death is part of a bigger puzzle that we can help you piece together.