Many people believe that an ‘easy’ way to avoid probate or to enable their children to assist them as they get older is to add their child to their bank accounts or even to the deed to their home. In our office, this is what we call ‘coffee shop’ and ‘beauty parlor’ law: You heard from a friend, whose neighbor’s non-lawyer brother-in-law said it was a good idea. And while once in a blue moon this strategy might work for someone, most of the time it backfires. There are many reasons why this approach is NOT recommended. Here are a few:
- The bank account or home will be at risk to your child gets sued. All it takes is for your child to cause a severe car accident, have someone get injured on their property or similar and next thing you know, your account is getting pulled into your child’s lawsuit.
- The account or home will be at risk to your child’s debts, creditors, and potential bankruptcy. One of my colleagues had a client that lost her home in her daughter’s bankruptcy. The woman had thought it was a good idea to put her home in her daughter’s name. The daughter then lost her job and with it, lost her health insurance. The daughter then had a major medical event and the medical bills put her in bankruptcy. In fact, medical bills are the number one cause of consumer bankruptcies.
- If your child goes through a divorce, your new “outlaw” (i.e., your former son-in-law or daughter-in-law) may try to pull your account into the divorce proceeding if your child is listed as an owner on the account.
- If you die, the account or home will only pass to the child that is listed on the title. If you have other children or family members, this is an almost guaranteed recipe for a family feud. We’ve seen it happen many times. For example, let’s assume you have three children and your will or trust says that your estate will be divided equally between them. One of your children lives in town and the other two live out of town. For convenience, you decide to add your in-town child to your accounts. As a result, upon your death, the entire bank account will pass to the in-town child and he or she is not in any way obligated to share it with his or her siblings (and in fact, might be required to file a gift tax return if they do share it!).
- Adding a child to an investment account or real estate can result in unfavorable income tax consequences for your children upon your death. Effectively, they could miss out on a huge tax savings opportunity if the investments or real estate grew in value between the time you purchased it and the date of your death.
- While the original intent may have been that it was still “your money” and your child won’t touch it, the temptation can rear its ugly head down the road. All it takes is for your child to fall on hard times—perhaps a job loss, health crisis, addiction, or some other crisis. At some point, it becomes too tempting and your child convinces himself or herself that you “would have wanted to help them out and won’t mind if they dip in the account a little bit”…and a little more… and a little bit more, until there’s nothing left. Yes, we’ve seen it happen.
- If your child is in an accident or has a sudden health event and is left disabled or incapacitated, your child may be required to spend your money paying for their care before your child can qualify for Medicaid, SSI, or other government assistance and disability benefits.
- Your son-in-law or daughter-in-law could end up in control of your account. If your child sets up a durable power of attorney and names his or her spouse as their agent, that gives their spouse (i.e., your son-in-law or daughter-in-law) authority to manage all bank accounts that your child owns—including your account that your child is listed on as a joint owner.
- A few years go by and you decide you want to sell your home. Maybe you just want to move to a new neighborhood or perhaps to downsize or move to a retirement community. You won’t be able to sell (or refinance) your house without your child’s consent and signature. And, if your child is listed on the deed, he or she is entitled to half of the sales proceeds. If our child returns the sales proceeds to you, then he or she may be required to file a gift tax return.
- Adding your child to an account or deed may constitute a gift requiring the filing of a gift tax return with the IRS.
- Once a child is added to your bank account, he or she can withdraw some or all of the account or can try to sell or mortgage his or her share of the house. Money has a funny influence on people and unfortunately, there are many stories and examples where children have wiped out their parents' savings.
The bottom line is that there are much more effective estate planning tools that can help us avoid or limit your exposure to these situations, such as a Durable Financial Power of Attorney and the use of a Revocable Living Trust that includes detailed disability instructions.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.