banking

Dangers of naming bank account co-owner

It may seem like a quick and easy solution to add the name of an adult child to one or more of your bank accounts if you anticipate needing help managing day-to-day finances. With the ability to tap into the accounts, your offspring can write checks to pay bills and handle other financial matters while avoiding the delays and costs associated with probate at your death.

However, this approach may have all sorts of unintended consequences. "Most people think all they are doing is putting a name on an account," says Rosanne Duane, estate planning attorney in Jupiter, Fla. But actually, they are more likely creating a joint account, making the other person a full owner, typically with rights of survivorship.

The bank account co-owner will inherit the account upon your death, which may not be your intention if you have other children or heirs to whom you want to leave part of the account. Creditors could come after the account if the co-owner has debt troubles and, of course, there's also the danger that the co-owner is not as trustworthy as you believe. Another risk is that if the co-owner is not a spouse and dies before you, you could owe taxes on the amount you will have "inherited" from the deceased, even if he or she never contributed a dime to the account. In most states, this is true even if the bank account co-owner is your child.

"You have to be very careful and very clear about what you want. Many people don't grasp the difference between legal ownership and convenience," says Duane.

"The No. 1 risk that I see is that people do these things with no regard to their will," says Liz Miller, author of "Clutter-Free Wealth" and president of Summit Place Financial Advisors. "It's very important that the way you title investment and bank accounts is consistent with your estate plan." When someone is named as a beneficiary on investments or as a co-owner on an account, those assets pass outside the will, she adds.

To accomplish the same objective as naming a co-owner to an account without the risks, Duane suggests either making sure the other person on your account only has signing authority, often referred to as a limited power of attorney, or granting that person durable power of attorney so they can handle all your finances. In both cases, the person will have complete and full access to the account or other areas of your financial life, but not ownership. At death, the accounts become part of the estate and distributed according to the owner's will or trust.

Does everyone need a power of attorney?

Don't assume you have to rush out and name a power of attorney, says Duane. Whether you need one will depend upon your level of wealth, types of assets you own and your family situation and support system. A discussion with an attorney will help determine which arrangements are suitable. For instance, if you have a fully funded living trust, you may not need a power of attorney.

"There's no such thing as plain vanilla," Duane says. "Everyone's situation is different, and you have to figure out what makes sense and fill in any gaps in your planning."

Most people think of creating a power of attorney to handle their finances if they become incapacitated. It's true that when properly drafted, it works well in that situation, Duane says. The challenge is making sure it covers every circumstance for the length of incapacitation. A more complete solution, she says, is to set up a living trust with a trustee who has all the power you would have in financial matters.

A power of attorney is also an effective way to handle finances for the short term if you plan to be out of touch for a period of time -- for extensive travel, for instance. "Most everyone is available everywhere these days, but if you're on a world cruise or climbing Mount Everest, you might be unreachable for a while," she says. Time-sensitive financial matters could be handled by a power of attorney in that case.

Planning early is the best defense

Naming a power of attorney is typically part of the process of making a will, says Miller. An attorney, rather than a do-it-yourself will-writing website, will be able to determine the best course of action for you and answer any questions. "My fear with do-it-yourself sites is that you want to be very careful that you truly understand all the legalese," she says. She also recommends the person who is named power of attorney be given a notarized copy of it to make it easier when the time comes to use it.

Duane says that when a client calls her to express concern about aging parents, the best outcomes occur when there has been advance planning. "The intention, you hope, is that they've set up a revocable trust or power of attorney. If not, you only have one option, and that's to go for guardianship in the courts," she says. That's a messy, expensive and time-consuming process. "It's stressful and emotionally draining on everyone. Even in the cases where a person is clearly incapacitated, the law presumes mental competence, so an examination is required."

By planning early, your financial life can continue without interruption if something happens to you. "I tell people to do as much planning as possible in advance," says Duane, "if for no other reason than to avoid guardianship."

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