A request I get frequently from parents is “I’d like to add my child to my bank account, in case something happens to me.” Show
The goal for most parents when they ask about this is to give their children access to their money during an emergency. It seems like it should be an easy process, too, and with proper planning, it can be. But parents should be aware that simply making a child the joint owner of a bank account (or investment account or safe deposit box) can have unintended consequences — and it’s often not the best solution during a family crisis. The vast majority of banks set up all of their joint accounts as “Joint with Rights of Survivorship” (JWROS). This type of account ownership generally states that upon the death of either of the owners, the assets will automatically transfer to the surviving owner. This can create a few unexpected issues. Subscribe to Kiplinger’s Personal FinanceBe a smarter, better informed investor. Save up to 74% Sign up for Kiplinger’s Free E-NewslettersProfit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail.
Transfers on deathIf the purpose of adding a joint owner to your account(s) is to give them access to your assets upon your death, there’s a better way to do it. Most financial institutions will allow you to structure an account “Transfer on Death,” or TOD. This is simply adding one or more beneficiaries to your account. There are a few benefits that this type of account has over a JWROS account.
Financial Power of attorneyAs discussed, if a parent is to set up an account as Transfer on Death (TOD), the beneficiaries have no access to the account while the owner(s) are still living. So, how does one plan for the event of being incapacitated? A financial power of attorney is a powerful document which, in effect, allows one or more individuals to perform financial transactions on your behalf. Often, this document is drafted by a qualified attorney, which is the approach I would recommend to my clients. Many financial institutions have internal financial power of attorney forms, which will allow you to give someone financial power of attorney over your accounts at that specific institution without having to hire an attorney. Regardless of how you set it up, there are many reasons why giving someone financial power of attorney is a better approach than adding them as a joint owner to your accounts.
It’s worth noting that most financial institutions require a review process of a financial power of attorney appointment. Generally, the institution’s legal department would want to review the document before allowing the designated person(s) to conduct transactions. This process can take several weeks, so if the family is facing an emergency, they may not have immediate access to the money. I would recommend making sure that all financial institutions where you have accounts have a copy of your executed financial power of attorney now, so it’s in place before it’s needed. The best of both worldsFor financial security “in case something happens,” parents generally shouldn’t be adding additional owners to their accounts. Rather, titling accounts as Transfer on Death and setting up a financial power of attorney is often a better approach. Doing both can prevent unexpected taxes and provide the child broader access to the parent’s finances when it matters most. Ideally, it will be a long time before “something happens,” but we should all be proactive about planning for these unforeseen events. As you may have realized, the rules around these decisions are complex, so don’t go at it alone. Talk to your estate planning attorney or financial planner about what you’re trying to accomplish and allow them to guide you. Planning in advance will make things much simpler for your loved ones should anything happen. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA. Can I transfer money from a joint account to an individual account?You can transfer money from the individual account to the joint account. You cannot transfer money from the joint account to the individual account.
What happens if I take money out of a joint account?The money in joint accounts belongs to both owners. Either person can withdraw or spend the money at will — even if they weren't the one to deposit the funds. The bank makes no distinction between money deposited by one person or the other, making a joint account useful for handling shared expenses.
Does joint bank account affect my taxes?All owners of a joint account pay taxes on it. If the joint account earns interest, you may be held liable for the income produced on the account in proportion to your ownership share. Also any withdrawals exceeding $14,000 per year by a joint account holder (other than your spouse) may be treated as a gift by the IRS.
Do joint accounts avoid gift tax?It depends on who is funding the account and how much is being withdrawn. If one of the two account owners does not contribute income to the account, any withdrawals made by that individual can be subject to federal gift taxes once the annual gift exemption of $15,000 is met.
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