Growing older brings with it financial challenges. Apart from the normal ones of simply “making ends meet”, come the practical ones such as: “I’m slowing down, shouldn’t I have someone on my bank account with me?” Or, “what if something happens and I’m not able to handle my own bills?” Many of my clients attempt to “solve” this concern by naming a child on a bank account with them. This is often the eldest child, or the one living closest. It is simple, common, and potentially dangerous.
Whenever clients come in with this type of arrangement, I urge them to remove the child’s name from their bank account. What most people don’t appreciate, is by putting that child’s name on the account with them, they have created joint ownership, not merely a convenient banking arrangement. Let’s say that you have three children. Your eldest, very helpful, lives nearby but is going through a nasty divorce. Your middle child is very successful, but has a poor relationship with the other children, though you are still on reasonably good terms. Your youngest is a “wonderful person” but has had trouble holding a job and has had several financial reversals. Let’s look at some of the risks of putting any of these children on your account with you.
Your eldest would be a good choice for executor or for holding a power of attorney. She have proven herself loyal and responsible. The problem is that by naming her on your bank account with you, she actually become a co-owner of your account. All the banks that I’m familiar with in our vicinity do not simply add a child to an account “for convenience”. Instead, the banks’ account contracts create a joint ownership of that account with you so that it belongs equally to them. You may say that your child is very trustworthy and would never take advantage of you. The problem for your eldest would be this would be one of her assets and may become a point of contention in her divorce. The unintended consequence is that you have made that account a joint asset of hers, and while you get along well with your daughter, your soon to be ex-son-in-law and his lawyer should not have an opportunity to see the money in your account as a possible target.
Your middle child has no such financial issues. However, because he has a poor relationship with his siblings, at your death you may be surprised at the outcome. You may have provided in your Will that your estate divides equally between your three children. However, what you may not realize is that your Will does not control the bank account. Instead, the bank account passes in full to your middle child as a joint owner. You may like to believe that he will share it equally and honor your wishes. However, he is under no legal compulsion to do so, and is fully entitled to keep the entire balance for himself. I have had some very unpleasant disputes among family members over the exactly this issue. There are measures that one can take in his or her Will to address this, but they are not nearly as effective as the solution I explained below.
Your youngest is really not a candidate for power of attorney many reasons. Is the responsibility with money would make him a poor choice and he should not have unrestricted access to your bank account. However, if they were named as a joint owner and he went through bankruptcy or was pursued by creditors, or got sued, your bank account would be exposed to his debts and obligations. Again, putting his name on the account is not merely a signing convenience. Instead, it creates a joint ownership and with it go all of the potential liabilities of the joint owner.
The solution is a properly drafted durable general power of attorney. The holder of the power of attorney does not own your account. Instead, you give them legal authority to use your account if you become disabled or no longer able to manage your own finances. All of the conveniences of a cosigner are obtained this way, and that child will be able to use a power of attorney to pay your bills, and your taxes, make arrangements with Social Security and do whatever else on the financial side that is necessary. However, if they go through a divorce, or face financial claims against them, go through bankruptcy, or simply don’t get along with the other family members, it will not affect your finances. Instead, at your death, the account will be controlled by your Will, will be an asset available to the executor to use to pay your bills and expenses, and then will pass to your heirs as you intend. Joint accounts are an example of home-made estate planning where the intentions are good, but the unintended effect can be a disaster.