Lynn Brenner's Family Finance

The Pros and Cons of a Joint Account With Your Child

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. 

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

NEED TO CASH CD: escape early withdrawal penalty?

Q: My condo burned to the ground last summer. I received money in early October, and put it in a 6 month Certificate of Deposit at Citibank. I was originally told repairs to the condo would take a year to complete. But as things stand, they'll be finished in April. The problem is the CD matures in April, and I need some of that money now. Is there a hardship clause that would allow me to take a portion of that $130,000 CD and give the contractor the money he needs to complete the project? -- MA, via email 

A: You're really at Citibank's mercy in this situation.  

Federal law says when you invade a CD within the first six days after your deposit, you must be charged a minimum penalty of at least seven days simple interest on the amount you withdraw. But other than that, banks are free to set their own penalties and there's no maximum limit. 

According to Bankrate.com, a personal finance website that tracks bank fees and interest rates nationwide, it's not unusual to forfeit three months of interest when you cash a two-month to 12-month CD before it matures -- and you could lose up to six months of interest when you cash out a 13 month to 36 month CD. 

In a worst-case scenario, you could lose some of your principal. For example, if the early withdrawal penalty is six months interest and you cash out an 18-month CD after four months, you owe the bank more interest than you've earned! 

Of course, banks do sometimes waive the penalty. If you die before your CD matures, for example, most banks won't charge your estate the early withdrawal fee.   

And they usually waive the early withdrawal penalty if your CD is also an Individual Retirement Account and you're over 70 and a half and must take a minimum annual withdrawal. 

You have nothing to lose by explaining your situation and asking Citibank to waive the penalty. You may find that the bank manager understands that customer goodwill should be a priority for a bank that owes its survival to the taxpayers.  

If not, here's some cold comfort: The early withdrawal penalties you pay on CDs are tax deductible.