Don't Add Adult Children to Accounts | Stewardship Concepts Financial Advisors

When planning for the future, many consider adding their adult children to their bank accounts, taxable investment accounts, or property deeds. This might seem like an easy way to avoid probate or get assistance as you age, but it often leads to unforeseen problems. The advice to do this may come from well-meaning friends or family members rather than professionals. Here are several reasons why this approach is generally not recommended:

Risk of Lawsuits

If your child is involved in a lawsuit, your assets could be at risk. Suppose your child causes a severe car accident or someone is injured on their property. In that case, your accounts might be pulled into the lawsuit as part of the settlement. This could mean the money you saved over the years could be used for legal fees or settlements.

Divorce Complications

If your child goes through a divorce, their ex-spouse may try to claim a portion of your assets if your child is listed as an owner on your account, potentially dragging you into the divorce proceedings.

Inheritance Inequities

If you pass away, your assets will go to the child listed on the title, potentially causing family strife. For example, if you have three children and add only one to your accounts for convenience, that child will inherit everything in that account, regardless of your will. This can lead to disputes among siblings and undermine your estate planning intentions.

Unfavorable Tax Consequences

Adding a child to investment accounts or real estate can result in significant tax drawbacks. Under current tax law, there’s a provision called a basis step-up, which allows the beneficiary of your property to step up the basis to the value of your property at your time of death. If the property has appreciated significantly since you purchased it, your heirs can avoid paying significant capital gains tax on that growth if they inherit it after your death. However, if you add a child to your property before you pass away, this is considered a gift, and they won’t benefit from this step-up, leading to a substantial tax bill if they ever decide to sell the property.

Gift Tax Issues

Adding your child to an investment account or real estate deed might constitute a gift, necessitating filing a gift tax return with the IRS. This adds another layer of paperwork and potential tax consequences you need to manage.

What Should I Do Instead?

Instead of adding your child to your accounts, consider appointing them as your power of attorney. This allows your child to manage your financial affairs and access funds without being listed as a co-owner. In the event of your incapacitation, your child will have the legal authority to assist with your finances, which is often the primary reason why people consider adding them as joint owners in the first place.

If your primary concern is avoiding probate without giving your child control over the account, consider designating the account as payable on death and naming your children as beneficiaries.

While adding adult children to your accounts might seem simple, it can lead to significant problems. It is crucial to seek professional advice from your attorney and financial advisor to explore safer and more effective ways to manage your assets and estate planning. This ensures that your intentions are honored and your assets are protected. We can't set up a power of attorney as financial advisors, but we work with many great attorneys here in Spokane. If you're interested in getting an attorney recommendation, let us know. We don't receive any commissions or referral kickbacks.