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Debunking Myths You Hear at the Bank
Banks and attorneys often take different approaches and give conflicting advice regarding the best way to designate owners and beneficiaries on bank accounts. Here are some common pieces of advice clients have heard from various financial institutions and the problems they could cause.
Myth: “Adding” a child to a bank account is the easiest way to give the child access to your account.
While it is true that “adding” a child to a bank account gives the child easy access, this also means that your child’s present – or future – creditors also have easy access to your account. Even if your child has not contributed a cent into the account, as soon as the child becomes a co-owner of your bank account, the money in that account legally now belongs to your child just as much as it belongs to you. Thus, if your child becomes embroiled in a divorce or lawsuit (even from an innocuous fender-bender), your bank account is considered an asset of the child which is available to pay the child’s spouse or creditors.
Myth: Having your child co-own your bank account will make it easier for your child to pay your final expenses upon your death.
Adding a child as a co-owner typically means that, upon your death, the balance in the account will legally belong to your child through a “right of survivorship.” While this does mean that the funds are available more quickly than having the account go through probate, it also means that the money in the account will legally belong to your child, not to your estate. This will reduce liquidity in your estate for the payment of necessary expenses and taxes. Even if your child chooses to use some of those funds to pay outstanding debts and expenses, this could actually open your child up to liability if not all of the creditors of your estate are paid in full. Under Virginia law, there is an order of priority for the payment of debts and expenses. If a child pays a lower-priority expense from the money he or she “inherited” from the joint account, the child is now legally responsible for paying all higher-priority expenses personally if there are insufficient funds in your estate. Keep in mind also that joint accounts can be pulled into an estate for the purpose of paying debts and expenses.
Myth: My co-owner child will “do right by” my other children and will share any money that is left in the joint account after expenses are paid.
Even if your child is the most upstanding, generous citizen in the world and really would share with your other children, this can have negative ramifications for the co-owner child. Any funds the child shares with a sibling would be considered a gift from the child, not you. And, depending on the amount given to the other children, your account-owner child may need to file a gift tax return. Additionally, the gift can penalize your child and disqualify her from receiving long-term care Medicaid or Veterans benefits in the future even if she would otherwise qualify for these programs to pay for her long-term care expenses.
Additionally, circumstances may arise that are completely outside the child’s control which would inhibit the child from sharing the money with her siblings. For example, if the child dies prior to making the distribution, then the remaining money in the account will pass pursuant to the child’s will or revocable trust, likely to the child’s spouse or her children, and not to your other children.
Finally, it is very common for the child to conclude that you must have wanted her, specifically, to receive the money in the joint account, rather than share it with her siblings. Often, the co-owner child has provided substantial assistance to the parent during the parent’s lifetime, and thus considers the joint bank account to the parent’s way of thanking her for this extra help, which the other children did not provide.
The Solution.
For all the reasons stated above, and more, estate attorneys typically recommend against naming a child as a co-owner of a bank account. Instead, naming the child as your agent under a durable power of attorney is the preferred way of granting access to your accounts. Through a properly drafted power of attorney, your child will be able to have access to your account during your lifetime in order to pay your bills. However, by accessing the account as your agent and not as a co-owner, the child’s creditors cannot reach the funds in your account. Additionally, any balance remaining in the account will pass according to your estate plan upon your death rather than being transferred to a child outright.
If you do not want the bank account to go through probate upon your death, you could consider naming all of your children as “pay on death” or “transfer on death” beneficiaries on the account. This way, the account passes to all of them equally, rather than relying on one child to gift a portion of the account to her siblings. However, if the funds do not pass through your estate, there may not be enough liquidity to satisfy debts or pay administrative expenses and taxes. Alternatively, creating a revocable trust and naming it as the owner or beneficiary on the account would also avoid probate while ensuring that the asset passes according to the provisions of the trust.
Finally, for some clients, it really does make sense to have the account pass through probate, depending on the client’s specific circumstances. Every person’s situation is different. When you sit down with your estate planning attorney, she creates a plan that is unique to you, your assets, your family members, and your specific desires for the way the assets pass to those family members. If you receive advice from your financial institution or from family members or friends, please consult with your estate planning attorney prior to making any type of change like those described above. Doing something that sounds so simple – “adding” a family member to a bank account – can disrupt that entire plan that you and your attorney have created together..
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