The Right Way to Add Adult Children to Your Bank Account
When a spouse passes away, the remaining spouse often feels a natural insecurity about being the sole signer on the bank accounts. They want someone to be able to pay their bills and handle their banking in the event of a hospital stay or illness that renders them incapable of handling their affairs themselves for a time.
The solution most people default to is to add someone, usually one or more adult children, to their bank accounts. It seems like the best solution because it’s very simple to do; however, I find that once people fully understand the ramifications of this course of action, they decide to do something else.
The risks of adding someone to your accounts
On any joint account – which is what you create by simply adding someone to your account – the person you add has full ownership of everything in the account. Whether it’s a bank account or an investment account, this is a problem for several reasons:
1. Your co-owner will inherit the account upon your death, which may be in opposition to what your estate plans dictate. Any account you make joint passes outside of your will, so if you intended for multiple children to divide your assets, the balance of any joint account is not included.
2. Any co-owner’s creditors can get at this account in any legal action, including divorce.
3. Co-owners are easy to add, but can be hard to remove. If you add your child to your account and decide you want to remove them later, you’ll have to get them to agree to it since their signature will be required.
3. Even if you are certain your child would never place you in either of these previous two situations, there is still substantial risk involved. If any co-owner you appoint is not a spouse and they die before you, taxes may be owed for "inheriting" half of the account balance. The fact that it was your money to begin with is irrelevant.
How to accomplish the same objective
Once I explain the potential issues with adding someone to an account, some clients choose to solve their problem by granting a Power of Attorney (“POA”) to the person they were planning to add. There are two different kinds of POA you can choose from according to how much access you want to allow:
1. A limited POA grants someone the authority to sign on your account so they can write checks.
2. A durable POA allows full access to your account, but not ownership. The person you appoint can write checks, withdraw funds, or even close your account. This allows the same access a co-owner would have, without causing the account to pass outside your will upon your death or creating tax liability if your appointee predeceases you.
I don’t always advocate one option over the other; the decision is a personal one and is up to the maker. I do, however, emphasize the critical importance of understanding the situation your decision will create before you take any action. Most bankers aren’t aware of these risks and will not alert you to any potential problems. If you have any questions about how to address your predicament, make sure to consult your attorney.