Should You Add Someone to Your Bank Account?
It is a common scenario: an aging parent wants to make sure a trusted child can access their bank account if something happens. The simplest solution seems to be adding that child as a joint owner on the account. But is that really the best approach? In many cases, the answer is no. Understanding the differences between joint accounts and powers of attorney can help you make the right decision.
Joint Accounts: What You Need to Know
When you add someone as a joint owner on your bank account, you are giving that person equal ownership of the money in the account. They can deposit funds, withdraw funds, and even close the account without your permission. This is true regardless of who deposited the money in the first place.
There are several types of joint ownership, and each carries different legal consequences.
Joint Tenants with Rights of Survivorship (JTWROS)
Joint Tenants with Rights of Survivorship is the most common form of joint ownership on bank accounts. Under JTWROS, when one owner passes away, the surviving owner automatically inherits the deceased owner’s share of the account. The account does not pass through probate, which is one of the reasons people find this option attractive.
However, there are significant risks. Because the joint owner has full access to the account during your lifetime, your funds are exposed to that person’s creditors, lawsuits, and divorce proceedings. If your child is sued or goes through a divorce, the money in your joint account could be at risk. Additionally, adding a joint owner may trigger gift tax consequences, and the account will be included in both owners’ estates for tax purposes.
Tenants in Common
With a Tenants in Common arrangement, each owner holds a specific share of the account. Unlike JTWROS, when one owner passes away, their share does not automatically pass to the surviving owner. Instead, the deceased owner’s share becomes part of their estate and is distributed according to their will or state intestacy laws.
Tenants in Common is less commonly used for bank accounts but may be appropriate in certain situations, particularly when the co-owners are not spouses and want their share to pass to their own heirs rather than to the other account holder.
Joint Tenants by the Entirety
Joint Tenants by the Entirety is a form of joint ownership that is only available to married couples. It provides similar rights of survivorship as JTWROS, but with an important added protection: in many states, the account is protected from the individual creditors of either spouse. This means that if one spouse is sued individually, the creditor generally cannot reach the jointly held account.
This form of ownership can be a valuable planning tool for married couples, but it is not available in all states and does not apply to unmarried co-owners.
Power of Attorney: A Better Alternative?
Instead of adding someone to your bank account, a power of attorney may be a more appropriate solution. A power of attorney allows you to authorize someone to act on your behalf with respect to your financial affairs without giving them ownership of your assets.
General Power of Attorney
A general power of attorney grants broad authority to your agent to handle a wide range of financial matters on your behalf. This can include managing bank accounts, paying bills, handling investments, and conducting real estate transactions. However, a general power of attorney becomes invalid if you become incapacitated, which is often the very situation you are trying to plan for.
Durable Power of Attorney
A durable power of attorney is similar to a general power of attorney but includes a critical provision: it remains in effect even if you become incapacitated. This makes it one of the most important estate planning documents you can have. Your agent can manage your finances, pay your bills, and handle your affairs if you are unable to do so, without the need for a court-appointed guardian or conservator.
Special or Limited Power of Attorney
A special or limited power of attorney grants your agent authority to handle only specific tasks or transactions. For example, you might grant someone a limited power of attorney to manage a particular bank account, sell a specific piece of property, or handle a particular business transaction. This can be useful when you want to give someone access to your finances for a narrow purpose without granting broad authority.
Springing Durable Power of Attorney
A springing durable power of attorney does not take effect until a specific triggering event occurs, typically your incapacity as determined by one or more physicians. This option appeals to people who are uncomfortable giving someone immediate authority over their finances but want to ensure that someone can step in if they become unable to manage their own affairs.
The downside of a springing power of attorney is that it can be more difficult to use in practice. Banks and financial institutions may require proof that the triggering condition has been met, which can cause delays at a time when immediate access to funds may be needed.
Which Option Is Right for You?
The right choice depends on your specific circumstances, but in most cases, a durable power of attorney is a safer and more flexible option than adding someone as a joint owner on your bank account. A power of attorney gives your agent the ability to manage your finances without exposing your assets to their creditors, divorces, or lawsuits. It also allows you to define the scope of authority and maintain greater control over your assets.
If you are considering adding someone to your bank account or need help establishing a power of attorney, contact our office to discuss the best approach for your situation.
