Estate planning can feel overwhelming. These legal documents handle significant assets, and there are many factors to consider when drafting them. Naturally, some people look for simpler ways to transfer their assets to their beneficiaries instead of fully planning their estate.
One common shortcut is naming a child as a joint owner on a bank account. This approach might seem practical, as joint ownership ensures that the listed individual automatically receives the assets upon the primary account holder’s death, avoiding probate.
While this strategy may appear straightforward, it’s important to approach it with caution. There are several risks and considerations to keep in mind before naming a child as a joint owner. Consulting with a Minneapolis Estate Planning Attorney can help you explore safer, more effective options for transferring your assets and protecting your family’s legacy.
1. There can only be one joint owner, who is going to get all the money in the account.
Typically, only two people can be listed on a bank account: the primary owner and a joint owner. In many cases, parents name one of their children as the joint owner of the account. Upon the primary owner’s death, the joint owner inherits all the assets in the account. However, this can lead to complications, especially if there are multiple children.
The joint owner receives all the money in the account, while other children who were not listed get nothing. This can result in disproportionate asset transfers, creating tension or resentment among siblings.
While a generous joint owner might choose to share the funds with their siblings, they are not obligated to do so. Additionally, if they decide to share the money, gift tax issues could arise since the funds would technically be distributed as gifts.
Naming minors or other family members as beneficiaries on accounts can lead to unintended consequences. To understand the risks and alternatives, learn more about why naming minors as pay-on-death beneficiaries can create problems. Proper planning ensures that your assets are distributed fairly and efficiently.
2. The joint owner will have access and control over the money in the account.
Naming someone as a joint owner of a bank account grants them ownership of the funds in the account. This means they can access and use the money at any time, however they choose.
However, adding a joint owner comes with risks. If the joint owner has existing liabilities, the money in the account becomes vulnerable. For example, if the joint owner is sued, the funds in the account could be used to cover legal expenses or satisfy creditors.
When deciding how to manage and protect your assets, it’s important to explore options that minimize risk and provide clear ownership structures. Learn more about how couples and families can structure their trusts to avoid complications while maintaining flexibility and control over their assets. Find out which trust structure might work best for your situation.
3. There can be taxation issues.
Gift tax issues can arise in joint ownership setups. Listing someone as a joint owner is equivalent to making a gift to them for half the value of the account. For example, if a bank account has $100,000, $50,000 belongs to the joint owner. It’s given as a gift by virtue of joint ownership. This can give rise to a gift tax return.
Another taxation problem is capital gains tax – if the asset on which the joint owner is added has appreciated in value (such as in the case of an investment account). In that case, the joint owner keeps the cost basis for purposes of calculating capital gains.
If the assets appreciate after the owner’s death, the cost basis resets to the date of death value. The joint owner can now sell it capital gains-free. Their purchase price is what the value was at the death of the primary owner. If, however, the assets were given to the joint owner during life, the purchase price and cost basis are kept. So when the assets are sold, it’s going to be subject to capital gains tax.
In conclusion, it might not be a good idea to list a child as a joint owner on a bank account in exchange for an estate plan. However, there is another, more practical way to do it. That is by adding a signer and getting a power of attorney document set up so that a person will have the authority to access the money. This will cause less problems in the long run.
