Many parents believe that creating a joint bank account with their children is an easy and effective way to make sure that their kids will have continued access to money through these accounts, should the parent die or become incapacitated.
On the surface, it sounds like a great idea. As a joint account owner, the child will have ongoing and immediate access to the money in the account. This access will allow them to pay bills and continue living as they did before the tragedy or emergency. Additionally, naming a co-owner can avoid probate, as the account will automatically transfer to the joint owner (the child).
Sounds good, right? In fact, many hidden dangers make joint accounts a poor estate planning tool, especially when it is the only estate plan in place.
There Are Two Primary Issues with Parent/Child Accounts
Misappropriation of Funds
While no one wants to think that a child or family member would misappropriate money in a joint account, it happens more frequently than you would imagine. In some cases, a child deliberately takes money from a joint account to cover personal expenses or other purchases, with no intention of replacing it. Other times, a joint account holder may only intend on borrowing the money but because of unforeseen circumstances, they might not be able to return it.
Conflicts with the Will or Distribution Plan
Oftentimes, a person may have one or more children but only make one a joint account holder. In some instances, the other kids don't want the responsibility or the hassle of being on the account. Sometimes, parents may believe that one child is more financially responsible than the others. Regardless of the reason, a parent may only select one child to be a joint account holder.
However, despite only naming one child as a joint account holder, the parent may want to distribute her estate among all of her children equally. In fact, she may even have a Will to that effect. The issue is that the joint account will immediately transfer into the joint account holder’s name, and not be considered as part of the probate process. This could result in the money in the account not being distributed as originally planned.
Separately, having one child as a joint account holder with the parent can lead to resentment and fighting between siblings. For example, assume that one child was named joint account holder and was using the money to provide for and take care of the parent. The child’s other siblings, who live out of state, were not actively engaged in the care of the parent. When the parent dies, the account goes directly to the joint account holder. The other siblings believe that they are entitled to an equal share of the money left in the account, while the joint account holder thinks he should have all of it since he cared for the parent until their death. As a result, the siblings end up fighting with each other.
In summary, joint accounts are not a bad idea in some situations. For a parent who only has one child who will inherit the entire estate, a joint account may be beneficial. However, when more than one child is involved, it may not be a useful estate planning device. It is much better to have a solid Power of Attorney, Will or Trust in place.
