Clients sometimes ask me if they can add their adult child’s name to their bank account(s) so the child can tap funds as needed or write checks on behalf of the client. While adding a child’s name seems like a harmless, familial gesture of love and trust, the financial consequences can be extremely negative to both parent and child.
June (age 65, widowed) has a $400,000 bank account in her name. She wants to add her son, Henry (age 35), to her bank account. June prefers to bypass her daughter, Matilda, since Henry is “more organized and better able to issue checks” if June is sick or away in Florida several months each winter.
Here are some unintended consequences June could encounter by adding Henry’s name to her bank account:
- Adding Henry’s name with rights of survivorship means Henry is entitled to all the same rights and responsibilities as June. June never intended to make this account a “gift” to Henry but adding Henry’s name means she has made a gift to Henry. This may trigger gift taxes or at least require June to file forms with the IRS to alert them regarding her “gift” to Henry.
- If Henry has some issues with a creditor and a judgment is levied against him, the entire $400,000 bank account could be garnished – even though June is co-owner of this account and she was not involved in any way.
- Henry can withdraw the entire $400,000 at any time for his own use and is not required to pay it back. If Henry is careless with these funds and uses them imprudently, the entire account could evaporate, leaving June empty-handed.
- Henry is separated from his wife and they likely will divorce. Henry’s wife will now be entitled to a portion of this jointly held account when their assets are divided up. (This is upsetting to June also because she is on poor terms with Henry’s soon-to-be-ex-wife).
- If Henry accidentally rear-ends a school bus and becomes involved in a lawsuit, subsequent claims and judgments involving money will include June and Henry’s account as part of Henry’s assets; the entire $400,000 could be awarded to the wronged party.
- June has a will that clearly states she wants to divide all her assets equally between her son, Henry, and her daughter, Matilda. If June dies unexpectedly after Henry’s name is added to her bank account, this ‘rights of survivorship’ joint account bypasses her will entirely. In effect, Henry will receive this extra $400,000 inheritance; it’s unlikely this account can be divided after the fact with Matilda. If June has specific trust provisions in her will, her joint account with Henry can undermine the initial intention of her trust.
- Adding Henry’s name to June’s account can affect Medicaid benefits, including entitlement to long-term care.
Adding a child’s name to your bank account is an example of a number of harmless, well-intentioned gestures that trigger unexpectedly negative consequences. In this instance, it pays in spades to consult with your financial planner and your estate attorney before contemplating even the simplest decisions.