When the small, administrative tasks of life such as paying bills become more difficult, it is fairly common for a trusted child to begin assisting their parents in this area. Their service can be a tremendous blessing to their parents as they continue to age gracefully and maintain independence for as long as possible. Family coming together and supporting one another is a beautiful thing, but there is a seemingly small mistake which could work contrary to an existing estate plan in the long run.
This all-too-common mistake is to add a child as a Co-Owner of their parent’s account rather than an Authorized User. The major difference between Authorized Users and Co-Owners is where the ownership interest lies. A Co-Owner has an equal stake in the account and owns the funds themselves, while an Authorized User does not. If an account becomes co-owned with a child, that account will become the property of the child at the death of the parents and will not be subject to division under the parent’s estate planning documents.
For example, imagine a couple has an estate worth $3 million total, and $1 million of this is held in a joint account that also lists one of their children as a co-owner. This same couple has an estate plan that calls for equal division of their assets between their 2 children. At the death of the couple, the one child listed as co-owner of the account will receive the $1 million in that account, in addition to a one-half share of the remaining $2 million in the estate, bringing that child’s total inheritance to $2 million total, while the sibling receives $1 million. This outcome could come as a shock to the other child and ignite a conflict between them.
Another risk of naming a child as co-owner of an asset is exposure to that child’s creditors. Generally speaking, accounts are exposed to the liabilities of all individual co-owners. This means that the funds could become reachable by the child’s creditors, claims in lawsuits, or, in the event the child divorces a spouse, possibly considered marital property subject to division. Even the most responsible and well-intentioned children can face unseen financial hardships that could unintentionally place their parents’ assets at risk.
Instead of naming a child as a Co-Owner, name the child as an Authorized User if the goal is to allow them to assist with the daily, administrative tasks of life. Each institution will have their own forms and processes to accomplish this. If you have not done so already, also obtain a Durable General Power of Attorney (DGPoA), which is a broader authorization to appoint someone to act as your financial agent on your behalf. Consult with an experienced estate planning attorney to advise you on which option will best serve your needs. If you would like to learn more about your options, please contact our office. We’d love to help you figure out what will work best for you.