Q: I’m considering adding my oldest daughter’s name to my checking account. With a joint account, she could pay my bills if necessary. Are there any other advantages of doing this? Are there any drawbacks? ER via email
A: There are both advantages and drawbacks to adding an adult child to your bank account.
On the plus side, a joint account can serve as both a current convenience and a long-range estate plan. Your child can do your financial paperwork while you're alive. And as the surviving joint owner she'll inherit the account without going through probate -- the legal process in which a court validates your will. (It's important to add, however, that whether or not avoiding probate is important depends on where you live. In some states, probate is time-consuming or expensive. In others, it's fast and cheap.)
The downside is that joint accounts have hidden pitfalls. When they don't work as you planned, the result can be disastrous for you and for your survivors.
Let's take it for granted that your child is totally trustworthy and will never use the account except for your benefit. The main potential problem during your lifetime is that joint accounts are subject to partition. This is a fancy legal way of saying that once your daughter’s name is on the account, her creditors can claim half of it. As a result, if she gets divorced, or becomes the defendant in a lawsuit, your money could be at risk.
The potential problem for your survivors is that a joint account could inadvertently disinherit some of them. A hypothetical example:
If you put your daughter Emma's name on your account, she'll automatically inherit 100% of the account when you die. This is true even if your will says the account is to be equally divided between Emma and her brothers, Gregory and Pete. Your will has no legal control over jointly-owned assets. They pass automatically to the surviving joint owner.
In addition to unintentionally disinheriting two of your children, this may precipitate a permanent rift in the family. (If your kids don't get along, one can imagine a very nasty scene in which Gregory and Pete accuse Emma of grabbing their inheritance, and she replies that they're more interested in your money than they were in helping take care of you while you were alive. Not the way you want to be remembered!)
Here are two alternative ways of accomplishing your goal:
Find out if your state has a law permitting "convenience-only" joint bank accounts. With this type of account, your daughter can use your money only for your convenience. She won’t have any ownership rights in the account during your lifetime or after your death.
(A big caveat: Even if these accounts exist in your state, you may have trouble finding one. In New York State, for example, convenience-only accounts have been a legal reality since 1991; but they've never been well-publicized and few banks offer or have even heard of them. Make certain that you're getting a true convenience-only account. I'd ask the bank for a written statement that the other person named on the account won't have any ownership rights in it.)
The second alternative is to keep your accounts in your sole name and give your daughter a financial power-of-attorney. That power lets her manage the accounts for you, but it confers no ownership rights, and it ends at your death.
If avoiding probate is important to you, you can make the accounts ‘in-trust-for’ or ‘pay on death’ accounts, which automatically go to the named beneficiaries.
(c) Lynn Brenner, All Rights Reserved.
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