A request I get frequently from parents is “I’d like to add my child to my bank account, in case something happens to me.”
The goal for most parents when they ask about this is to give their children access to their money during an emergency. It seems like it should be an easy process, too, and with proper planning, it can be. But parents should be aware that simply making a child the joint owner of a bank account (or investment account or safe deposit box) can have unintended consequences — and it’s often not the best solution during a family crisis.
The Trouble With Joint Bank Accounts
The majority of banks set up joint accounts as “Joint With Rights of Survivorship” (JWROS) by default. This type of account ownership generally states that upon the death of either of the owners, the assets will automatically transfer to the surviving owner. This can create a few unexpected issues.
- If the intent was for the remaining assets not spent during the family crisis to be distributed via the terms of a will, that’s not going to happen. As previously stated, the assets automatically transfer to the surviving owner, regardless of what your will says.
- Adding anyone other than a spouse could trigger a federal gift tax issue. For 2023, any U.S. citizen can gift up to $17,000 per year tax-free to anyone they want, but if the gift exceeds $17,000, and the beneficiary is not a spouse, it could trigger the need to file a gift tax return. For example, if a parent has a $500,000 account and they make it a JWROS account, naming their child as co-owner, and the child makes a $20,000 withdrawal, they have in effect received a gift $3,000 above the annual gift tax exclusion.
- If a parent adds a child to their $500,000 savings account and the child predeceases the parent, a portion of the account value could be includable in the child’s estate for state inheritance/estate tax purposes. In this scenario, the assets would transfer back to the parent, and depending on the deceased’s state of residence, state inheritance tax could be due on 50% (or more) of the account value. In Pennsylvania, where my office is located, the inheritance tax to a child would be 4.5% if assets are passed to a lineal decent.
A Better Way: Transfer on Death
If the purpose of adding a joint owner to your account(s) is to give them access to your assets upon your death, there’s a better way to do it. Most financial institutions will allow you to structure an account “Transfer on Death,” or TOD. This is simply adding one or more beneficiaries to your account. There are a few benefits that this type of account has over a JWROS account.
- If the beneficiary passes before the account owner(s), nothing happens. The previous example of a potential 4.5% state inheritance tax on any portion of the account value would be completely avoided.
- When the account owner dies, the beneficiary simply needs to supply a death certificate to the financial institution, and the assets will be transferred. Because the assets transfer to a named beneficiary, the time and cost of probating the will are also avoided, as named beneficiary designations always supersede your will. This applies not only to TOD accounts, but also to retirement plans, annuities and life insurance — really, to any account that you add a named beneficiary.
- Setting up an account as TOD does not give the beneficiary access to the account until the passing of the account owner(s). Therefore, the change in titling is in no way considered a gift by the IRS, thus eliminating the potential federal gift tax issue.
Also Consider a Financial Power of Attorney
As discussed, if a parent is to set up an account as Transfer on Death (TOD), the beneficiaries have no access to the account while the owner(s) are still living. So, how does one plan for the event of being incapacitated?
A financial power of attorney is a powerful document which, in effect, allows one or more individuals to perform financial transactions on your behalf. Often, this document is drafted by a qualified attorney, which is the approach I would recommend to my clients. Many financial institutions have internal financial power of attorney forms, which will allow you to give someone financial power of attorney over your accounts at that specific institution without having to hire an attorney. Regardless of how you set it up, there are many reasons why giving someone financial power of attorney is a better approach than adding them as a joint owner to your accounts.
- There is no such thing as a joint retirement account. IRAs, 401(k)s, annuities etc., can have only one owner, so it’s not even possible to make someone a joint owner. If a parent becomes incapacitated, they often want their child to have access to all their assets, not just their bank accounts.
- You can set up a successor in the event the original person you appoint is unable to serve. It’s always good to have a back-up plan, and you can name a successor when you execute your power of attorney paperwork, or you can amend it later.
- You can give your financial power of attorney the ability to conduct real estate transactions on your behalf. For example, there are many situations where a child is helping an elderly parent sell their home or buy a new one, especially if the parent is experiencing cognitive issues. In this example, if the parent gave financial power of attorney to one or more of their children (while the parent was still healthy), they could most likely be able to negotiate terms and sign on their parents’ behalf.
It’s worth noting that most financial institutions require a review process of a financial power of attorney appointment. Generally, the institution’s legal department would want to review the document before allowing the designated person(s) to conduct transactions. This process can take several weeks, so if the family is facing an emergency, they may not have immediate access to the money. I would recommend making sure that all financial institutions where you have accounts have a copy of your executed financial power of attorney now, so it’s in place before it’s needed.
The Best of Both Worlds
For financial security “in case something happens,” parents generally shouldn’t be adding additional owners to their accounts. Rather, titling accounts as Transfer on Death and setting up a financial power of attorney is often a better approach. Doing both can prevent unexpected taxes and provide the child broader access to the parent’s finances when it matters most.
Ideally, it will be a long time before “something happens,” but we should all be proactive about planning for these unforeseen events. As you may have realized, the rules around these decisions are complex, so don’t go it alone.
Talk to your estate planning attorney or financial planner about what you’re trying to accomplish and allow them to guide you. Planning will make things much simpler for your loved ones should anything happen.
Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.
This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.
Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.
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