By Jane Young, CFP, EA
As we get older, it is natural to worry about how we will manage our finances as we need additional assistance. As a result, many seniors consider adding an adult child’s name to their bank and investment accounts or to the title of their home. You probably trust your child, so this seems like a logical solution. However, this can have huge negatives ramifications on your finances.
If you add a child’s name to your accounts, they become a co-owner. They will have full rights of ownership to write checks, make withdrawals, and invest the money without any restrictions or approval from you. They will become a joint owner or a “joint owner with full rights of survivorship” – which means, when one owner passes the surviving owner automatically becomes the sole owner of the account or asset.
The joint owner will inherit the accounts without going through probate, which may not be your objective. The automatic transfer of assets may contradict your will and your intentions. Other children or heirs would be disinherited.
Additionally, if the child you added to your account dies before you, half of the assets in the joint accounts will be distributed in accordance with their will. You could end up giving half of your assets to your child’s spouse or children. If you put your child’s name on the title of your home, you may be forced to sell the home to provide your child’s heirs with 50% of the home’s value.
Additionally, if your child is co-owner of your assets, his or her creditors could come after half of the joint assets should they be sued or forced into bankruptcy. This may seem unlikely today, but things can change. Your child could contract a severe health condition or be found negligent in a bad car accident resulting in financial insolvency.
There are also negative tax consequences to adding a child to your account. When children inherit highly appreciated assets, including a home, they get a step-up in basis. This limits their taxable gain, on inherited assets, to appreciation occurring after your death. When assets are placed in a joint account your child will only receive a step-up on 50% of the assets.
The IRS will also require you to file a gift tax return if 50% of the value of assets placed in the joint account exceed $17,000. However, it is highly unlikely you will owe any tax with the 2023 federal combined gift/estate tax exemption at $12,920,000.Avoid adding your child’s name to your accounts or the title to your home. A better option is to work with a trusted estate planning attorney to draft a financial power of attorney (POA). With a POA, when the time is right, you can authorize another person to make financial decisions on your behalf without giving up ownership of your assets or putting them at unnecessary risk.