Adding Adult Children to Ann Arbor Bank Accounts - Simple Solution or Devastating Consequences? (Part 1 of 2)

Elderly Woman Confused

                At Legacy Law Center, we frequently meet with clients who are sure that they don’t need to retitle their checking or other accounts to the name of their trusts, because they have added the names of one or more adult children as additional owner(s) of the account.  Now, they reason, my daughter who lives only a couple of miles away from me can easily buy my groceries and run errands for me.  More importantly, if they have a will-based plan, they may know that by adding additional names to the account, the account will not be a probate asset so long as the other named owners outlive them.  It all sounds perfectly easy, doesn’t it?

                As is so often the case in our complex, modern world, the answer is actually no.  While adding co-owners (most commonly adult children, but possibly other family or friends as well) to bank accounts seems easy to set up, several factors can complicate your situation in negative ways.

                Imagine a scenario where Mrs. Jones is a widow with two adult children, Jim and Sally.  Sally lives out of state and only visits over the winter holidays, but Jim and his wife live close to Mrs. Jones and routinely assist her with her shopping and bill-paying.  Because Mrs. Jones doesn’t leave home frequently, she and Jim head to the bank and add Jim as a co-owner on her checking account.  Now, they reason, Jim can sign checks to pay his mother’s bills and can use the account to buy her groceries and anything else she needs.  Mrs. Jones, Sally and Jim all understand that this co-ownership is only for practicality’s sake, because Sally does not live nearby.  Mrs. Jones reassures her children that she has a will leaving everything she owns to the two of them equally, so the account will be divided between them upon her death.  Moreover, Mrs. Jones feels proud that she has essentially taken an asset (her account) out of her probate estate by naming Jim as an owner, and the account won’t be held up in a lengthy court proceeding.

                The above situation may sound familiar, and it is certainly common.  However, there are some substantial problems on the horizon.

                First, imagine that Mrs. Jones is still living and needs the contents of her bank account to pay her bills.  Jim happily assists his mother and only uses his access to the account to pay for her needs.  However, Jim started a small business last year.  Like a majority of small businesses, Jim’s fails.  His wife subsequently files for divorce.  He finds himself in fairly serious debt that he cannot pay; that is, until his creditors realize he is a co-owner on his mother’s account.  Although Mrs. Jones and Jim know that his name is only on the account so he can purchase day-to-day items for his mother, all that the creditors see is that he owns a substantial bank account.  And because he is an owner on the account, the creditors can take the entire account.  That’s right – not half. The entire thing.  Bank account owners are each considered to own the entire amount in a given account, even if they share ownership with another person, and regardless of the reason for that co-ownership.  If Jim owes $25,000.00, and Mrs. Jones’ account has $20,000.00, the creditors can seize the entire account toward satisfaction of Jim’s debts, leaving Mrs. Jones in serious financial trouble.  Moreover, Jim’s ex-wife, who Mrs. Jones was not close to, may end up with some of her hard-earned and carefully saved money through a divorce settlement.

                Next, imagine that Jim is financially solvent and there are no problems with Mrs. Jones’ account.  After several years of joint ownership, Mrs. Jones passes away.  Her children begin the process of gathering information about her assets to bring to their mother’s attorney.  Jim reassures Sally that their mother’s checking account is not a probate asset – his name is on it.  Jim is now the sole owner of the account.  When the two speak to their mother’s lawyer, however, they hear something surprising.  Although Mrs. Jones’ will left everything equally to Jim and Sally, Jim is correct that her checking account with his name on it is not a probate asset and is therefore not subject to the terms of her will.  Moreover, Jim is now the sole owner on the account.  It is legally his, and only his.  There is no easy legal recourse for this, even though it contradicts what their mother wanted!  Jim assures Sally that he will share the contents of the account with her, as their mother wished.  However, on the drive home, Jim begins thinking about all of the time he spent with his mother while Sally was in another state, and begins to think that maybe the money shouldn’t be shared with Sally, especially because he doesn’t have to share it.  How do you think Sally will feel about this development? How would their mother have felt?

                Finally, in the absence of the above issues, imagine that Jim is financially solvent and willing to share the account 50-50 with his sister after Mrs. Jones passes away.  Now, even imagine that Jim is an only child, and his mother intended that he alone inherit everything she owned. No problem? Not quite.  While a carefully constructed estate plan can pass assets to descendants in a way that minimizes tax implications, simply adding a name to an account does not do this.  Jim will become the owner of the account by default, not by inheritance, as he would have through a will or a trust.  Therefore, he may encounter serious tax consequences that he could have avoided had his mother planned differently.

                But, you may ask, what should I do instead of adding my children to my account?  They help me all the time, and it’s so easy!  This seemingly simple question requires some thought and sound advice to avoid complications in the future.   In our next blog we will discuss the pros and cons of several strategies to allow your children to help.