Clients often tell us they’ve put their child “on” their bank account. In our experience, that can mean several different things about the way the bank account is set up. And each of those different set ups has dramatically different ramifications for ownership and inheritance of the property.
Parents are usually trying to make sure their kid can access the money if the parent becomes incapacitated. That way, the child can pay the parent’s bills right away. It’s a good idea, but you have to be careful to tell the bank exactly what you are trying to accomplish. So, which method do you actually want to use? Read on to learn more:
Co-Owner/Joint Tenant (No!)
Sometimes, when a parent puts a child “on” their bank account, they’ve added that child as a co-owner or a “joint tenant” on the account. This is almost never what a parent wants, but often what a parent gets when they are too casual in talking to their banker!
With a joint tenant account, the parent certainly has met the goal of giving the child easy access to the money. But, as soon as the parent adds the child to the account, that child becomes a true co-owner. The child has no legal obligation to spend the money for the parent. If the child gets sued or divorced, 100% of the money in the account is at risk. And, when the parent dies, the child likely inherits the contents of that account, regardless of what the parent’s will says. So usually a joint tenant account (where the child is a co-owner), will accomplish the parent’s goal, but it’s usually a mistake because of the risks involved and the changing inheritance rights.
Note, too, that technically the child has been gifted money in that account, and the parent could be obligated to file a gift tax return to report that gift. The gift could even be taxable in certain circumstances!
Pay-on-Death (No!)
Sometimes, the parent ends up establishing the child as a pay-on-death (“POD”) beneficiary of the account. This is typically not at all what the parent actually wants to do. With a POD, the child does NOT have access to the money during the parent’s lifetime. Instead, the child inherits the account at the parent’s death, regardless of what the parent’s estate plan says.
So here, the money is not at risk during the parent’s life in the same way a joint tenant situation puts the money at risk. But the child has no access to the money if need be, and the POD designation bypasses the parent’s estate plan.
Authorized Signer (Yes!)
Typically the approach the parent actually wants to take is to add the child as an “authorized signer” on the account. An authorized signer has the ability to use the money in the account, but that money does not belong to the signer. (So if your kid gets sued, your money is not at risk.) Also, an authorized signer does not automatically inherit the money at the parent’s death – instead the money passes according to the parent’s estate plan. Typically, this is the approach that meets the parent’s goals, without creating any additional problems.
So make a note to yourself – if you put your child “on” your bank account, it’s time to review what the bank thinks that means. See if it actually means what you want it to mean. If not, it’s much better to fix that problem now, rather than leaving a mess for your family.
And if we can help you think through this or any other estate planning issue, contact us or schedule a complementary new client meeting today!