Parent-Child Joint Accounts: An Estate Planning Stumbling Block

It is exceedingly common for an older parent to add a child to one or more financial accounts. Whether to start helping immediately with managing their day-to-day finances (like staying on top of the bills) or maybe just as precaution against potential future disability or incapacity, they go into their bank or brokerage and request that this “trusted child” be put on the account. The representative on the other side of this transaction dutifully obliges and after five to ten minutes of keyboard clacking, the trusted child is added to the account and gains the access necessary to help the parent whenever the need should arise. Simple, free, and effective. No wonder this scenario is so common.

So, what’s the problem? The issue isn’t with the parent’s logic. What they are doing makes perfect sense given what they are trying to accomplish and the assumptions they are usually operating under. No, the fault lies with financial institutions and their default response to the parent’s request. More often than not financial institutions respond to such requests by converting the account into a joint account with right of survivorship. It’s the right of survivorship that’s the real fly in the ointment. When the parent dies, the entire account passes automatically by right of survivorship to the trusted child on the account. This doesn’t sound like a negative at first blush. But consider that most older adults have more than one child and usually intend for whatever of value they leave behind when they die to be divided equally between their children. Here, the account passes by right of survivorship solely to the trusted child. It is now their money. Inheritance by right of survivorship supersedes any contrary provision in the parent’s will or other estate planning instrument. The money is theirs and they are under no legal obligation to share it with the parent’s other children or other beneficiaries under the will. Sure they can still choose to do the right thing and honor the parent’s intentions, but that doesn’t always happen. There is now uncertainty where there should be clarity and predictability. Even if they decide to honor the parent’s wishes, problems can still arise. Maybe there was important planning in the parent’s will, such as a trust for a disabled child or a minor grandchild, that has now been bypassed. Or maybe there were debts and taxes that the parent’s estate needed to pay, but now that process has been skipped and the children are exposed to potential liability. What if the trusted child dies shortly after the parent before getting around to distributing the money? Will whoever is in charge of the trusted child’s own estate be as accommodating of the parent’s estate plan? The parent’s planning has taken a backseat to chance.

Thankfully there’s an easy way to avoid the risks that come with a parent putting a child on an account as a joint owner. The proper approach is for the parent to sign a financial power of attorney naming their trusted child as their agent for financial transactions and decisionmaking. The account stays in the name of the parent, the trusted child gets the access necessary (through the authority granted in the power of attorney) to help the parent with their finances, and, crucially, no right of survivorship is inadvertently created. The best way to put a financial power of attorney in place for the parent to meet with an estate planning attorney. The attorney should be able to draft a personalized financial power of attorney in short order and for a modest fee.

However, even if the parent doesn’t want to bother with the financial power of attorney, whether because they think it’s unnecessary to meet with an estate planning attorney or they don’t have time at the moment, there is still a better way to go about things. They need to insist to the bank or brokerage representative that their trusted child be added to the account either as (1) a signer only; or (2) as a joint owner but without right of survivorship. A signer-only arrangement gives the trusted child access to the account for transactional purposes, but no ownership interest and no right of survivorship. A joint account without right of survivorship does give the trusted child an ownership interest in the account, but there is no automatic inheritance of the entire account by the trusted child at the parent’s death. The only assets in the account that they own when the parent dies are assets that the child contributed themselves (which, in most cases, would be none). Because so many financial institutions default to setting up joint accounts with right of survivorship, the parent must clearly ask for one of these alternative arrangements and ensure that their request has been understood and processed correctly. If the representative maintains that these arrangements are not possible (as they sometimes will, depending on how rigid and formulaic the account options are on their end) then, for the reasons outlined above, I would strongly urge the parent to guard against the pitfalls of parent-child joint accounts by opting instead for executing a proper financial power of attorney.