6 Ways Adding a Trusted Child to Your Bank Account Backfires

Outliving your child is a gut-wrenching experience. It's even worse when you've put their name on your financial accounts and owe tax on what you "inherit." Here are 6 reasons to leave your accounts in your own name and get a durable power of attorney for convenience.

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When an aging parent needs help managing their financial affairs, they may turn to a grown child and, for convenience, place that child’s name on their bank accounts. But what seems like a simple solution opens the door to all kinds of problems.

Consider the turn of events that Carol and Paul Kurland endured, as reported in AARP Bulletin. In their late 80s, the Levittown, PA, couple added their 56-year-old daughter to their bank accounts, figuring the arrangement would come in handy if they became ill. They trusted her; and one day she would inherit all their assets anyway. But it was the daughter who fell ill. She died and the Kurland’s got socked with a tax bill.

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Under Pennsylvania law, when the daughter’s name was placed on the Kurlands’ accounts she became a one-third owner of the assets. So on her death, mom and dad “inherited” that share of their own money. Some states specifically exempt parents of descendants from inheritance tax, and only six states levy such a tax anyway. But it’s a wake-up call to the costs of convenience.

According to Senior Citizens Law Office, the risks of adding a child’s name to your bank accounts include:

  • Your child could withdraw all of the money in the account and use it for personal purposes (such as a trip to Las Vegas).
  • Your child’s creditors could come after the money in the account to settle their debts.
  • If the child were sued, the courts might award money from your account to pay damages.
  • If your child is married and later divorces, the child’s spouse might claim a community property interest in the account.
  • A child co-signor might defeat your estate plan. The co-signor becomes the owner of the assets upon your death, no matter what it says in your will.

The good news is that you can gain the convenience you desire with much less risk. You simply need a durable power of attorney, which gives a child lifetime access to your accounts without legally handing over any assets.

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With a durable power of attorney, your child can still mismanage your financial affairs. But your child’s creditors and spouse will have no claim on your assets, which will be divided as you prescribe in your will. And you’ll never have to worry about compounding the loss of a child with a tax on what’s already yours.