Most of my senior clients want to be able to transfer their assets to their children in the simplest and quickest way possible.  The way they usually want to do this is by adding their child’s name to one or more of their bank accounts.   

If you don’t think about it too hard, the logic makes sense.  Most parents want to assure that their bills, mortgages, insurances or even funerals get paid for should something happen to them.  Yet most senior clients and children don’t realize the risk that this small change in their accounts creates.

Even though I think that this is stating the obvious, each person on a joint bank account is legally considered a full owner when it comes to withdrawing money from the account.  Therefore, the risk of a child withdrawing money, borrowing money or accidentally losing the checkbook/debit card for their parent’s bank account opens the door to the possibility of losing the parent’s savings through theft, stolen identity or bank account access.

Once a child is added on a joint bank account, it becomes an asset for both parties. So if a situation arises where the child has a creditor problems, that creditor could garnish the entire bank account, regardless of the parent’s involvement in the creditor claim.  This could result in the accounts being frozen or possibly in the loss of the account funds.  Of course, most of my clients tell me that their children don’t have creditor problems.  That is, until they get into a car accident or someone slips and falls on their property.  Now that child has creditor problems.  Any lawsuit claim or judgment settlement for money will include this account as part of the child’s assets.

As noted above, any assets in this assumed bank account are deemed as owned property by the parent and the child. What if the child’s spouse files for divorce? That divorcing spouse could be entitled to a portion of the joint bank account funds.  Even if it turns out that the divorcing spouse is not entitled to any of the assets, that account could be frozen and tied up in the litigation until it’s all settled.

As you probably know, joint accounts or any asset registered jointly with rights of survivorship bypass the Will of a deceased person.  So in this case, the Will does not impact the money in joint bank accounts.  This might not be an issue if the child is the only beneficiary of the parent’s estate.  If not, it can create a major feud among other beneficiaries, as the dividing process is not that easy after the fact.  Furthermore, should the parent’s Will include specific trust provisions related to their estate planning goals, this change in ownership of the bank account could have drastic and irreversible effects on everything from inheritances, taxes or other estate expenses, since this account would bypass the Will’s provisions.

Most clients are not aware of the gift and estate tax issue, as the laws are pretty complex.  As far as the IRS is concerned, adding a child to a parent’s bank account is indirectly making a gift, which may or may not be subject to gift tax for the parents.  Furthermore, the amount of money in the account and how many children are added as owners all plays into the gift tax issue.  While most of my senior clients do not need to concern themselves with gift and estate tax as the NY exemption is over $2 million, it is still important to note that a possible gift or estate tax issue could be a problem for some parents.

There are many more issues of concern in this area, such as their effect on long‑term care or Medicaid‑related issues, but, outside of a small checking or savings account, putting a child’s name on a bank account, or any asset for that matter, is probably not a good idea.