Reconsider Adding Children to Your Bank Account

00:00:05
I’m Beau Ruff, and I think you should reconsider adding children to your bank account. You’ve maybe heard the conventional wisdom many times before your friends or family, or even at times, the bank teller will tell you that you should add your child to your bank account. Maybe it’s a checking account or savings account or both, the advice goes something like this.
00:00:26
If you want your children to have access to your money to be able to pay your bills, should something happen to you, then you need to add them to your bank account. The theory also suggests that without adding the name on the account, the account might freeze at your death and no one would be able to access the funds until a lengthy.
00:00:45
Probate process has concluded so many of us choose to put child’s name on the account and we choose the most responsible child to handle this duty. But the plan is fraught with potential problems. The good news is there is a better solution. First, what are the problems with adding a child to your account?
00:01:04
The first thing is the last will, and testament doesn’t apply to your bank account. Every bank account. Well, let’s just say 99% of them are opened with a joint owner, as what’s called joint tenancy with right of survivorship. This means that if one person dies, say the parent. Then the joint owner say the child becomes the sole owner of the assets in the account. This also means that the parents last will and testament doesn’t usually work to direct where the money goes. Instead, the entirety of the account legally goes to the joint owner, that one child.
00:01:41
Second, splitting the account among multiple heirs is complicated. Let’s assume the money in the joint account is ultimately supposed to be split among several beneficiaries, like 3 kids. Let’s further assume the responsible child really will split the money among his or her siblings and not refuse to split and keep all the money.
00:02:02
The potential problem is that the joint tenant child is legally entitled to the funds, so when that child tries to split the funds and transfer to the siblings, there would be the potential that it would be a gift subject to the requirement for a gift tax return. Next, you might expose your assets to additional creditors.
00:02:24
The joint ownership structure also can expose the parent’s assets to creditor claims. So, imagine that the child named on the bank account causes a car accident and is later sued. Or maybe they get divorced. The child is technically an owner on the account, and the bank account for which the child is an owner might be used to satisfy the creditors claim. The bottom line is that the child could subject the parent’s funds to a claim from a third-party creditor. Next, estate tax reporting is actually more complicated. So, from an estate tax perspective The Internal Revenue Code places an additional burden on all accounts held as joint tenants with rights of survivorship, and that is the first person to die. And let’s just assume it’s the child who unexpectedly dies first, has to claim all the assets held in the account as his or her own assets, subject to the potential estate tax.
00:03:22
Except to the extent the child’s estate can prove that it wasn’t his or her money, the law basically places the burden on the estate to prove the asset was not owned by. In this case, the child.
00:03:34
So, what’s the solution? Well, we have a litany of problems that can arise in the areas of gift tax, estate tax, exposing assets to 3rd party creditors. Is there a better way? The power of attorney is the answer. A power of attorney is a legal document that allows the agent.
00:03:54
In this case, the child to act on behalf of the principal. In this case the parent. It provides authorization without implied ownership. The distinction between authorization and ownership is important. The parent’s likely goal is to provide simple authorization and not ownership. In most cases, a power of attorney can be made effective immediately upon signing to allow the child immediate access to the account for bill paying, it can apply not only to bank accounts.
00:04:23
But also, to all assets. Alternatively, it can also be limited to just apply to specific assets like bank accounts. Either way, the parent gets to choose the type and extent of the authorization 2 final notes, the small the amount held in any joint tenancy with right of survivorship account. The smaller the potential problems if a parent has a single child that is supposed to inherit the parent’s estate, and there’s $1000 in the account, then in such a situation. The child’s name on the account is not likely to cause a significant problem.
00:04:57
The power of attorney cannot keep the bank account from freezing upon the parent’s death, but this is just not as big of a problem as it seems. If the estate is subject to probate, you can typically unfreeze the account in a matter of days. If you’re in a hurry or weeks in the normal course of events.