The clear answer to whether you should add your child or children as a joint owner on your accounts or property.
I’ve said it before, and I will say it again. STOP adding your children or other non-spouses as joint owners on accounts and titles just for estate planning purposes. If your question is whether to add a child or other non-spouse as a joint owner on an account, don’t do it until you read this. Let’s talk about why!
Yes, I’m an attorney, but no, I’m not your attorney. This information is purely for education and information and is not legal advice. Nothing in this post is legal advice or constitutes an attorney-client relationship.
Why You Shouldn’t Add Your Child or Non-Spouse As a Joint Owner
A client recently came to me to work through an estate plan. Over the course of the conversation, she was quite proud to inform me that I did not need to worry about planning for any of her accounts because she had already added her kids to the accounts as joint owners.
With the kids as joint owners, she guaranteed that the funds would pass to her children at her death rather than needing to go through probate.
In nearly the same breath, she explained to me that one child had been a recent casualty of bankruptcy and another child was contemplating a divorce.
(INSERT SQUEALING BRAKES SOUND HERE) RRRRRRRRRRRT
I pulled the brakes on this conversation and asked for more explanation.
In just one little conversation she identified 2 main reasons for not adding a child as a joint owner on an account.
Every case is unique and has its own facts and circumstances. However, I want to discuss here why I have never recommend joint ownership with a child as a method of estate planning.
Below, let’s go over:
- Why you shouldn’t add a child as a joint owner due to potential harms to you.
- Why you shouldn’t add a child as a joint owner due to potential harms to them.
- What you should do instead.
Let’s discuss.
RELATED POST: Think Twice before Adding a Child as a Joint Owner.
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The Four D’s: Why you shouldn’t add your children as a joint owner because of Death, Debts, Divorce, or Disability.
Just some of the reasons why you should not add a child or non-spouse as a joint owner include the 4 D’s. The 4 D’s are death of a child, debts of a child, divorce of a child, or disability of a child.
Death of the joint owner:
Death: If you add your child as a joint owner on your account (assuming no survivorship language), and your child dies before you, your account is now subject to your child’s estate claims. Now, the account that you need for your support –that receives your income— pays a portion to your child’s estate or heirs.
If your child dies with young children, a spouse, or even charitable intentions, your account must pay out to the children, the spouse, or the charitable institution.
Any account bearing your child’s name alongside yours is added to your child’s list of estate assets. It’s on the list regardless of what your intentions were at the outset. You lose control over the money.
Therefore, if you add a child to your account, and he or she dies, then you may lose a large portion of the account.
Debts of the joint owner:
Debts: If your child declares bankruptcy, he or she is required to submit a list under oath of all assets that he or she owns. If your child is a joint owner on your account, then he or she must list your account as an asset.
Sure, you might be able to argue that you actually own the account. But, who wants to show up in bankruptcy court to do that?
Or, if you don’t believe that bankruptcy is an issue, what about other creditors and liabilities like insurance companies or settlement claims?
If one of your children is in a terrible accident not covered by their insurance, then they have to satisfy the claim out of their personal assets. When your child is added as a joint owner on your account, then your account is now on their personal asset list for creditor claims.
Don’t do it. If your children are added as a joint owner on your account and then have a significant debt or bankruptcy, then your account could be at risk.
Divorce of a joint owner:
Divorce: In 2020, more than 1.2 Million people got a divorce. And, divorce rates are rising among people over 50.1 So, if you don’t believe that your children will be a party to divorce simply by virtue of how long they have been married, don’t discount the risks associated with divorce.
If you add your child as a joint owner, and he or she gets a divorce, your asset is now on the divorce asset list. Their community property now includes your lifelong savings, retirement, income, and more.
Again, you might be able to go to court and prove that your assets are actually separate. You could argue that your child has no actual ownership, but who wants to do that?
If your child gets a divorce, your joint account could be at risk, and it is just another reason why you shouldn’t add them as a joint owner.
Disability of a joint owner:
Disability: The fourth “D”, disability, is yet another reason why you should not add your child as a joint owner on your account.
Many state and federal benefits (Medicaid, disability, etc) require that a person meet certain asset and income ceilings. If he or she exceeds the asset ceiling, then he or she is required to spend those assets before qualifying for state or federal benefits.
Therefore, if you and your child are joint owners on your savings account, retirement account, or other asset, half of your assets needs to be spent on your child before he or she can receive those benefits.
In other words, joint ownership could prevent him or her from receiving the state or federal support needed. It could also result in a significant loss of your own assets. Finally, joint ownership could leave the asset subject to estate recovery by the state or federal agency.
Your child’s disability or healthcare needs could be another reason why you should not add your child as a joint owner on your account.
How adding your child as a joint owner could harm your child.
The 4 D’s above against why you should not add your child as a joint owner on your accounts or assets all focus on potential harm to you. But, even if you are prepared to take on the risk, your children could face other problems if you name them as a joint owner.
Specifically, your children may owe additional taxes, or may never see his or her share after your death.
RELATED POST: What are the types of Joint Ownership?
Tax Concerns of adding a child or non-spouse as a joint owner on accounts or assets
In 2023, the annual exclusion amount for making gifts is $17,000. This means that you can make a gift to any person in the amount of $17,000 or less without it eating into your lifetime exclusion amount. Most people have a lifetime exclusion amount of over $11 Million (depending on your personal circumstances).
The taxes all get very confusing. Put simply, if you leave one child as a joint owner expecting that he or she will pass the assets to the rest of your children or intended beneficiaries, then he or she might have to pay gift tax.
Let’s look at an example:
Mom has a mutual fund worth $100,000 and 2 children. Mom explains to Child 1 that she added Child 1 as a joint owner because she trusts Child 1 to do what is fair for Child 2.
Child 1 and her spouse have a small business and a net worth that exceeds the lifetime exclusion amount for gift and estate taxes. When mom dies, Child 1 receives all of the proceeds of the mutual fund. Child 1 writes a personal check to Child 2 for ½ of the mutual fund proceeds ($50,000).
Child 1 is now subject to gift taxes on the $50,000 that Child 1 paid to Child 2. The Child 2 does not pay the taxes and neither does mom’s estate. Child 1, under law, is on the hook for the taxes.
Further, those tax rates range between 18% and 40%. For Federal gift taxes alone, Child 1 is left with a tax bill of as much as $20,000 just for transferring the asset to Child 2.
Now Child 1 has only received a gift from mom of $30,000 rather than the entire $50,000 she would have received with proper estate planning.
Unenforceability of gifts from joint owners
Or worse, what if Child 1 finds out that Child 1 will have a hefty tax bill and chooses not to make the gift at all?
As a joint owner, this is well within Child 1’s rights.
Your child, as a joint owner, is under no compulsion to share the asset unless there is a contract or other document in place. And, Child 1 isn’t interested in writing an additional check out of Child 1’s assets to Uncle Sam.
At that point in time Child 1 can keep the entire mutual fund, make no gifts to Child 2, and Child 2 is left with no gift at all. Thus, Child 1 pays no gift tax, and benefits from the entire account.
Or, worse yet, what if your joint owner simply doesn’t want to transfer the assets to the other children.
The law isn’t going to make them share the joint account.
And, if your children are joint owners, each has the legal authority to the entire proceeds of the account. This means that the first to the bank gets the entire account. Winner takes all.
Now, in an effort to DIY your own estate planning, you avoided probate but failed to direct your assets to your intended beneficiaries. One child receives everything, while the other gets the bills or nothing at all.
RELATED POST: Types of Joint Ownership
In short, I have lots of reasons why you should not add a child or other non-spouse as a joint owner on an account for estate planning purposes.
How to avoid adding a child as a joint owner.
If you made it this far, you’re listening. But now you are wondering what you should do instead of adding a child as a joint owner?
Alternatives to adding a child or non-spouse as a joint owner
The first step in proper estate planning is meeting with a knowledgeable and reputable estate planning attorney. Your attorney can give you lots of alternatives to joint ownership that are personally tailored to your needs.
Related post: What should I ask my estate planning attorney?
Some alternatives to joint ownership include:
Transfer on death or pay on death beneficiaries: Adding a child as a beneficiary rather than an owner protects your assets from the 4 D’s and ensures that each child receives his or her respective share without interference from a probate court.
Transfer on death deeds: In some US jurisdictions, state law allows for transfer on death deeds. Transfer on death deeds are a placeholder in the property records that only change ownership after your death. Upon your death, your child or other intended beneficiary receives your home or other property without probate.
Trusts: Proper trust planning allows you to transfer your assets without court or probate interference. It also maintains your privacy and control. Further, trusts plan for unexpected deaths, changes in circumstances, and other contingencies. Those plans protect you against the 4 D’s and your children against unwanted tax or greed!
RELATED POST: Why do I Want to Avoid Probate?
Placing your accounts or other assets into a trust allows you to retain all autonomy and control during your lifetime. It ensures that your assets reach your intended beneficiaries after your death.
RELATED POST: What does it mean to have a trust?
RELATED POST: Why might I want a trust?
Stop adding your child as a joint owner for estate planning purposes!
Now you know that there are lots of reasons why I never recommend adding a child or other non-spouse on your personal accounts or assets.
Adding joint owners on your accounts can result in harm to you, to your children, or to your intentions.
Adding a child as a joint owner leaves your assets vulnerable to death, divorce, debt, and disability. Joint ownership with a child can leave your child with a big tax bill or with nothing at all.
Instead, take the time to accomplish your goal of avoiding probate and protecting yourself and your children by meeting with an estate planning attorney in your jurisdiction.