Jane Young, a Colorado business columnist and certified financial planner, said in a July 2023 column that when seniors begin to think about how they’ll manage their financial assets as they get up in age, they often consider adding an adult child’s name to their bank accounts, their other financial assets, and also possibly to the title on their home. She said this can seem reasonable, especially when the son or daughter is well trusted. But “this can have huge negative ramifications on your finances.” She offered several reasons why.
- Adding a child’s name to your accounts makes them a co-owner. “They will have full rights of ownership to write checks, make withdrawals and invest the money without restrictions or approval from you.” When one is what is technically known as a joint owner with full rights of survivorship and one owner dies, the surviving owner automatically becomes the sole owner of the account or asset. “The joint owner will inherit the accounts without going through probate,” Young noted, “which might not be your objective.” It might contradict your estate planning intentions and could disinherit other children or heirs.
- Young went on to note that 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 the deceased child’s 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 might be forced to sell the home to provide your child’s heirs with 50% of the home’s value.”
- There’s more, said Young. “If your child is co-owner of your assets, his or her creditors could come after half of the joint assets should the child be sued or forced into bankruptcy.” Suppose, for instance, that the co-owning child contracts a severe and exorbitantly costly health condition or is found negligent in a bad car accident, resulting in financial insolvency. Half of your assets could be at risk.
- And Young also points to tax ramifications. Many people know that when children inherit highly appreciated assets, including a home, they get a “step-up in basis,” meaning the original cost basis is adjusted to reflect the fair market value of the asset upon the owner’s death. This new basis limits an heir’s taxable gain on the inherited asset. But when assets are placed in a joint account, your child will only receive a step-up on 50% of the assets.
Young’s advice: Instead of adding your child’s name to your accounts or the title to your home, work with a trusted estate planning attorney to draft a financial power of attorney. “With a power of attorney,” she said, “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.”