Last week, one of my clients said, “I want to open a joint bank account with my daughter. That way, if I become incapacitated or have health issues or other problems, my daughter could step in and start paying my bills; take care of things.” I said, “Sure, you can do that, but let’s talk over the risks first, so you can make an informed decision.”
I’d like to explain those risks to you readers as well. You probably understand that whoever is on your account will have complete access to that money. Whoever is on that account could drain it at any time. But remember, by adding your child to your account, you’ve also exposed that money to any lawsuits, divorces, or bankruptcies—any kind of financial hardships your child may incur. If your daughter declares bankruptcy, her creditors may have access to that money. If your son gets divorced, his ex may have a claim on that money. Your child’s debt collectors may be able to gain access. It could even be your own child who taps into that account during an especially tough financial time.
Taxes can become another risk factor. When you put a child on a joint account, you are not gifting them the amount in the account. However, if the child ever writes a check from that account for his or her own benefit, that money becomes a gift. And if your child takes more than $14,000 out of that account, then you as the donor will owe gift taxes, which can run anywhere from 35 to 50 percent of the amount of the gift. In other words, if your son writes himself a $24,000 check, that $10,000 above the gift tax cap of $14,000 could cost you $3,500-$4,500 in taxes.
It may seem like a good idea to add your son or daughter to your bank account, but if you are considering it, I urge you to consider all the downsides, too, so you can make an informed decision.