It’s a frequent question: “Bryson, should I add my child to my bank accounts?”
While it might seem a straightforward solution for convenience or probate avoidance, this step can lead to significant, unintended consequences. I rarely recommend it.
Let’s explore why, and what alternatives I typically suggest.
Unintended Consequences
- Unforeseen Inheritance Tax: In Pennsylvania, if a child over 21 is a co-owner, their portion of jointly owned accounts may face a 4.5% inheritance tax upon their unexpected passing. I’ve seen substantial unexpected tax bills result from this.
- Liability Risk: Adding a child as a co-owner makes them a legal joint owner. Should your child face debts, lawsuits or judgments, your shared account could be vulnerable to their creditors.
- Gift and Capital Gains Tax Implications: The IRS may consider adding a child as a joint owner as a gift, potentially requiring IRS Form 709 (gift tax return) depending on the amount. For real estate, adding a child to the deed could convert potential inheritance tax into higher capital gains tax for your child when the property sells, as they may not receive a “stepped-up basis” at your death. Always consult a CPA or tax advisor and an estate planning attorney before such transfers.
Thoughtful Alternatives to Consider
Estate planning doesn’t have to be complicated or expensive. Most estate planning attorneys can draft a comprehensive plan. Here are powerful, often-overlooked alternatives:
- Durable Power of Attorney (POA): A POA grants a trusted individual authority to manage your financial affairs, like bill payments and account maintenance, without giving them legal ownership. This is effective during your lifetime, even if you become incapacitated.
- Authorized Signer: For limited access, you can designate an authorized signer on bank accounts. They can write checks or make deposits but have no ownership.
- Transfer on death (TOD) / Pay on death (POD) designations: A TOD (for investment accounts) or POD (for bank accounts) allows you to name a beneficiary who directly receives assets upon your death, bypassing probate. This effective and often free tool is excellent for specific accounts.
- Trusts: A trust is another robust estate planning tool that can help assets bypass probate. Various types exist with unique legal and tax implications. If probate avoidance is a key objective, or you have complex distribution wishes, consult an estate planning attorney about a trust.
Before making any decisions about your financial accounts or estate plan, I strongly recommend consulting with an experienced estate planning attorney (and a tax advisor when appropriate). They can help you navigate these complexities and determine the most prudent strategies for your unique circumstances.
