Why Not Add Your Child to Your Bank Accounts?

Clients frequently tell me they want to add a child as a joint owner on their accounts and assets for “convenience”. There are numerous reasons why this should not be done, and why it is probably the most inconvenient thing that you can do. The biggest reasons people want to do it are to avoid inheritance tax, and the money will transfer automatically to the child, and not get frozen, upon the parent’s death. Although technically true, most people don’t realize that if the child dies first, the parents will have to pay inheritance tax on their own money.

In Pennsylvania, the inheritance tax to lineal descendants is 4.5%; thus, the parent would have to pay 4.5% on half of all the assets on which that the parent and child are joint owners. It is not pleasant to have to pick up the phone, as I have had to do, and tell a parent who lost a child that, although they are grieving, unfortunately, they have pay tax on their own money. The shock and dismay on the other end of the phone is palpable. Why? I only added my child to the account because the bank teller told me to, etc.

Yes, when a person dies, accounts in that person’s sole name are technically frozen. However, it only takes a few days or a week to be able to open an estate account, and the process is relatively simple, after which the executor can start paying bills. A week of a little inconvenience is certainly worth avoiding all the risks that are associated with joint accounts with children.

When a person ends up in long-term care and looks to qualify for Medicaid to be able to pay the bills, having joint-owned accounts is often anything but convenient. For the parent, the caseworker is going to look at who contributed the money into the account, and oftentimes the caseworker will then try to count 100% against the child who had access to it. There are so many issues with joint accounts with children that it does not pay to have do it. At Bellomo and Associates we offer weekly workshops, and a good portion of the workshop is directly around this concept of the reasons not to do it, from the different perspectives of tax, long-term care, and estate planning. Sometimes, it pays to be a little inconvenienced to avoid a catastrophe.

Editor’s Note: This article was submitted by Jeffrey R. Bellomo, Esquire, CELA of Bellomo & Associates.