Adding Child’s Name to Parent’s Account – Part 2

In last week’s blog post I addressed a common question in our practice – how best to add a child to a parent’s bank account.  There are two options – giving the child access as agent under power of attorney or adding the child as a co-owner.  This week I explain the pros and cons of each choice.

As I explained last week, the power of attorney must specifically reference the action to be taken by the agent in order for a financial institution to accept it.  Adding a co-owner to the account requires both owners to sign paperwork with the financial institution reflecting the new owner.

An agent under power of attorney can only act as long as the principal is alive.  Once Mom passes away, by law the power of attorney is terminated.  To access this account after death, the child must gain access thru the probate (if there is a will) or estate administration (if there is no will) process.  While this may sound like something to avoid, there are other considerations.

By adding the child as a co-owner, if Mom dies first the child will receive at least 1/2 and probably the entire account proceeds by operation of law no matter what the will or intestacy law says.  That’s because most joint accounts are with rights of survivorship.  When one co-owner dies the other owner(s) by law assume ownership of the deceased owner’s share.  If Mom intended to leave everything equally split amongst her children but only one of them is co-owner, then that child will receive more than the others.  This is not the case with the POA since the child is only acting as a fiduciary and does not own any share of the account.

The co-owner child can certainly decide to split the account with his/her siblings to honor Mom’s wishes but that transfer is treated as a gift from the child even if the will states Mom’s intention to split everything equally.  Again, the joint account is not controlled by the will or intestacy law (if there is no will) so is of no relevance to this account.  Depending on the value of the account, the gift may be small enough that it does not exceed the annual gift tax exclusion (currently $19,000 per person per year) so no gift tax is incurred but if the account value is larger than that, gifting becomes a bit more involved.

One way to avoid this problem is for Mom to add all her children as co-owners on the account.  This, however, potentially creates another problem.  While statistically less likely to occur, what happens if a child dies before the parent?  We had a recent case in our office with exactly that scenario.  Next week, I’ll tell you what happened.