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Should your Adult Child be a Co-Signer on your Bank Account?

by ACTEC Fellows Crystal W. Edwards and Letha S. McDowell

  Crystal-Edwards LethaMcDowell
  Crystal W. Edwards

Letha S. McDowell

What does it mean to add a co-signer to a bank account? Is it a good idea? ACTEC Fellows Crystal W. Edwards and Letha S. McDowell, estate planning experts, explain why you should not have an adult child as a co-signer on a bank account, what the liability is and the difference between a co-signer and a beneficiary.

Hi everyone, my name is Crystal Edwards. I'm an ACTEC Fellow from Morristown, New Jersey and I am here today with my friend and colleague Letha McDowell.

Hello everyone, I'm Letha McDowell and I'm an ACTEC Fellow from Kitty Hawk, North Carolina.

We are coming to you today to talk about one of the questions that we hear more often than we'd like. When should we add a child to a bank account? So, with that said, let's get started. Letha, how early is it to start thinking about estate planning?

Crystal, I would tell you and anyone else who asked that it's never too early to get started with planning. Even as early as age 18, it is appropriate to have a Power of Attorney (POA) and Healthcare Power of Attorney (aka Healthcare Proxy), which I believe there might be another video out (Estate Planning for a College Student or Young Adult) there about that. But it becomes more and more important as people accumulate assets, maybe have children, own businesses. So, it's never too early to plan but becomes more and more important as we get older.

People will often ask me, especially in the community - I don't have much. I just have a 401k, maybe I have some life insurance, but I have a couple of bank accounts. Do I really need a will? Can't I just add my kid’s name to my bank account? What do you say to that?

I hear this more often than I’d like. You are correct. But having a child added to a bank account is different than having a will for a variety of reasons; and having that will is important either way, but that doesn't change my advice. That in almost no circumstances do you want to add a child to a bank account. That's because most of the time when you add a child to a bank account, you end up adding them as a joint owner of that account. Now there are different ways to add a child. You could add them as an agent under a power of attorney or add them as a designated beneficiary to that account and that is something different; but making a child a joint owner on a bank account is almost never a good idea.

What are some of the disadvantages, then? So, if it's not a good idea, why isn't it a good idea?

Crystal, that's easy - liability. Whenever you add someone to your account and make them an owner, then you have opened yourself up to potential liability that exists because of actions in their life. You have also increased your risk for financial abuse or exploitation. It's going to be state law dependent, but it opens that door.

That liability piece just hit home. I don't think a lot of people realize that if they add their kid’s name to their account - but if their child gets sued or if anything happens to them personally - then now mom or dad's money is on the table. So that is huge to think about. Also, one of the things that will come up is just avoiding the probate process. Right? And the cheapest, sometimes, way to do it. Are there other ways to avoid the probate process than just by naming a child on a bank account?

Absolutely. So you could add somebody, add a child or multiple children to a bank account, as designated beneficiaries, which is just like a beneficiary designation on a life insurance policy but it exists for bank accounts and investment accounts. And those assets do avoid probate because they're paid directly by the bank to whomever the designated beneficiaries are. Another option is trust planning. Sometimes you'll hear the term revocable trust or living trust or revocable living trust. That trust planning will also avoid probate.

So sometimes the probate and estate planning tail wags the dog and other times people are just really worried about making gifts and making sure that their kids have access to money. So, what do you say to a client who suggests that they add their daughter to a bank account so that if they need long-term care later, at least half of the account is protected? Is that true?

That's a great question and one that I hear frequently. Unfortunately, the answer is no. That's not true. Adding a child to an account in no way protects the account for purposes of public benefits eligibility. Typically, the account will still be considered countable or available to the original owner. In addition, in some states adding that child to the bank account may be considered a gift or an uncompensated transfer that unfortunately leaves that individual in a penalty period and thus unable – that adding them to the bank account makes them unable to access public benefits.

Wow, there are a lot of advantages and disadvantages to really think about before we do something that just seems so simple. And for some reason, bank tellers like to recommend to seniors, especially seniors, to add children to accounts. I guess it's less paperwork. Do you experience that too?

Crystal, absolutely. And it's one of those things that drives me absolutely nuts. I'm not sure that bank tellers recognize that in certain cases, by adding a child to a bank account as a joint owner that they're actually creating mini-estate plans that will result in the disposition of assets, which may be different than what was originally intended. Unfortunately, no one often figures that out until the senior can no longer speak for themselves, either because they've lost capacity or because they've died and no longer have a voice.

So, it sounds like the moral of this story is get legal advice from a lawyer.

You know it. Absolutely.

Thank you so much, Letha for your time today. Thank you, everyone, for joining us and we look forward to seeing you next time