Re-think Joint Accounts with Adult Children

Joint accounts have for years been considered the “poor man’s will.” After all, property passes outside of probate to the joint owner. Thus, you avoid any legal fees involved with probate. This becomes particularly important if you want to leave certain assets to your children and not to your new spouse. Moreover, many joint accounts are set up so that the children can help pay bills for the parent. Thus, it seems like a good idea and is recommended by many financial planners. HOWEVER, there are a lot of pitfalls associated with having joint accounts with adult children.

First, assets in joint names can be subject to creditors of the child. Thus in some states creditors can potentially freeze or take the assets.

Second, although joint accounts with adult children can save probate and legal fees, they won’t save estate or inheritance taxes. Joint accounts are part of the estate. There are a number of better ways to avoid estate taxes than using joint accounts. I should note that unless you have a sizable estate, this may not be a problem depending on what amount of exemption Congress will implement. 

Third, the child has full access to the joint accounts. Thus, if your child has some financial problems, it is very tempting to raid the joint accounts for his/her own benefit.

Sandy’s Elaboration: If you want to see a huge family disaster, see what happens when adult children take funds from the joint accounts without your authorization. It has created huge rifts in families.

Finally, Joint accounts pass automatically to the joint owners upon your death regardless of what your will states. This was indelibly brought home to me with one of my friends.

She had two siblings, one of which took care of the grandmother who was developing dementia. The grandchild then had the joint accounts put in her name so she could write bills for granny’s support and maintenance. This went along quite well until grandmother died. Despite granny’s desire to leave all of her assets to her sole surviving child, as noted in the grandmother’s will, the joint accounts were all rightfully transferred to the one granddaughter who was the co-owner. This created a huge rift within the family. Even ten years later, not one family member talks to the sibling who got all of the grandmother’s money.

Here is what can you do. There are a number of better approaches to joint ownership.

First, you can name a “pay on death beneficiary” to the joint account. At least this provides that someone else would get the funds upon your death and not the joint owner.

Secondly, you can name a trusted child as your agent with a durable power of attorney. This allows them to pay bills, but the assets and accounts will transfer in accordance with your wishes in the will.

The best approach is to set up a revocable, living trust. This will provide the same advantages of avoiding probate, as joint accounts provide, plus the assets in the trust will go to the person you name as beneficiary and NOT to the trustee unless you name them as beneficiary. Moreover, the creditors of the trustee can’t take the assets or freeze the assets in the trust. Finally, the trust has set rules against looting by the trustee. Thus, they can’t legally take the money for their own benefit.

Bottom line: before you set up joint accounts with adult children, consider Fagen’s prophetic words in the play Oliver when he said, “I think I’ll think it out again.”

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