It is quite common for a parent to put a child’s name on his or her checking account, savings account, or brokerage account, with the intent of making it easier for the child to access funds in the event of the death or disability of the parent. Sometimes this is also done because a parent believes that by adding the child’s name to an asset, he/she is protecting the asset from taxes and long-term care costs. While the purposes for which this is done may be well-intended, adding a child’s name to one’s assets can have serious, unexpected and undesirable consequences.
By putting a child’s name on one’s accounts, you are making that child a joint owner with the power, during your lifetime, to withdraw monies from these accounts. Even though you may trust your child implicitly, you need to be concerned about the unintended consequences of making the child an owner. Simply put, since the child legally owns the asset, creditors of the child can levy against it. If the child becomes involved in a divorce action, bankruptcy, or other litigation matter, the asset will be at risk.
The purpose of minimizing taxes and protecting your assets from long-term health care costs is not achieved by making your child a joint owner of your accounts. In order for an asset to be excluded from your taxable estate, you must give up all ownership rights. For long-term care purposes, most joint assets are considered as being wholly owned by the parent and not by the child or other joint owner.
At death, joint assets pass outside of your will, by operation of law, to the joint owner. In effect, the joint ownership designation supersedes the terms of any will or trust you have created. This is true of “in trust for” accounts and accounts which are designated as “transfer on death”. In fact, any account which lists a particular person or persons as the beneficiary passes directly to the person named, regardless of the terms of any will or trust which you have created during your lifetime. Through the use of joint ownership and beneficiary designations, you may be effectively disinheriting people you intended to provide for, and/or giving more to others than you want. In addition, if all your assets pass outside your will, then your Executor may be liable for expenses and taxes but not have funds in the estate with which to pay them.
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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.