Saturday, May 14, 2011

Should I Add My Daughter to My Account?

Mary and her daughter, Nancy, were very close.  Mary was still able to make all of her financial decisions, and paid all of her bills on time each month.  Keeping a high bank balance gave Mary comfort that she would be able to access money whenever she needed it.  She was worried that she might “lose it” at some point, so she asked Nancy to become a signer on her bank account.  She and Nancy became joint owners of Mary’s bank account, although Nancy acknowledged that her mother was the real owner of that money.

Nancy was not quite as meticulous about her finances as her mother.  She had used the overdraft protection on her bank account on many occasions when she forgot to record her purchases in her check register, or when she needed something and didn’t have the money to pay for it.  Nancy’s bank account was in the same bank as the account she and Mary owned together.

One day, Nancy overdrew her bank account by a significant amount.  Per the rules of the bank, money was withdrawn from the joint account of Mary and Nancy.

When Mary checked her account online, she was horrified.  What had happened to her money?  She could not imagine how her bank balance had gotten so low and raced to the bank to get to the bottom of what was obviously the bank’s mistake.  When the bank employee explained that the money had been transferred to Nancy’s account to cover an overdraft, Mary was horrified.  She had no idea that by letting Nancy become a joint owner of her account, she had given Nancy the right to use all of her money. Mary immediately closed the account and transferred her money to another bank.

Nancy had no idea that her mother would be liable for her overdraft, and was ashamed that her mother knew about her bad money habits.  Over time, she was able to pay her mother back.

Many older clients tell me they want to add their children to their accounts and to their real estate.  They tell me that they do that so they can avoid probate, and so that their children will be able to manage their money for them should they become incapacitated.

I rarely recommend joint accounts for people who are not married or in a committed relationship.  There are a couple of reasons why I think it is usually a very bad idea.  First, just as with Mary and Nancy, the assets in a joint account are deemed to be owned equally by either party and are available to the creditors, predators, and ex-spouses of both parties.  Second, at the death of a joint account owner, the asset belongs to the surviving joint owner.  Most of my clients have more than one child, and their wills almost always leave everything equally to each of their children.  Yet, when they jointly own an asset with only one child, that asset belongs to that child alone at the time of the death.  You may be relying on the generosity of the surviving child to share the proceeds with his or her siblings.  If there are more than two joint owners, the asset belongs to whomever is the last man standing. That means that if one child predeceases the parent, the asset will belong to the surviving child when the parent dies. Since most of my clients intend for their grandchildren to inherit their deceased parent’s share, this type of planning usually defeats the intent.

Finally, the joint owner can take the whole asset whenever she wants because a joint owner can withdraw the entire amount in the account without the consent of the other owners. 

In my next post, I’ll talk about ways to manage money during incapacity and avoid probate without using jointly owned accounts.

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