Why Joint Accounts with Adult Children is Risky Business
Are the Benefits Worth the Risk?
In this article we will talk about the risks of joint accounts with your adult children, potential impacts to your financial security and share a case study of a client embroiled in legal proceedings with her son.
As we grow older, we either lose the desire to manage our finances or struggle to keep up with bill payments and make basic financial decisions. Turning to your adult child for help seems like a logical solution and many simply add them as a joint account holder to their bank and investment accounts. And, at the time of your death, the account is not frozen and is not subject to the probate process or taxes. Your adult child can continue to access the money to pay required expenses.
Sounds like a solid plan, so what’s the problem?
3 Reasons To Think Twice About Joint Bank Accounts
Let’s look at three reasons why joint accounts with adult children could be a dangerous, high-risk decision. When you make someone a joint account holder, that person has the same rights under your account as you do. That means:
- Divorce Settlements & Creditors: Assets in your account are available to creditor or divorce settlement claims of the joint account holder. If your adult child goes through a divorce or has creditors knocking at their door, your money is at risk.
- Unethical Withdrawals: Your assets may not be available to be distributed as directed in your will because your joint account holder has taken the money for their own use instead of for your benefit, leaving nothing for your other intended beneficiaries.
- Unfair Distribution of Inheritance Money: The joint account holder may withdraw money in the account upon your death leaving your other beneficiaries in limbo. They wait longer to receive their inheritance while the executor sells off other assets to pay debt and taxes, and receive less than you intended.
Let’s review Shelly’s story to learn how my client’s decisions landed her in hot water battling her son in court. Names have been changed to protect my client’s confidentiality.
Shelly’s Story: A Tragic Tale about Joint Accounts with her Adult Son
Shelly is embroiled in legal proceedings with her son trying to get back the money he took from their joint accounts. Had she done some research, trusted her instincts, and not agreed to the easy solution her son pitched her, things might have been quite different. But hey, hindsight is 20/20.
Shelly’s Son Managed her Finances under an Enduring Power of Attorney, but was He a Suitable Choice?
Meet Shelly, age 92 and Sam, age 94. They needed help managing their financial affairs and relied on their son Nathan to informally take over. When they moved into a care facility, they formalized his role under an Enduring Power of Attorney (EPOA). This role gives Nathan full control over his parents’ finances and property. As their attorney, he bears legal responsibility for his actions and must demonstrate all decisions made are in the best interests of his parents. Learn more about Enduring Power of Attorney (EPOA) on the Alberta Government website here.
Over time Shelly and Sam became concerned about Nathan’s management of their finances and reached out to the Trust arm of their financial institution to inquire about their Power of Attorney services. When Nathan learned about this, he set to work to convince them this was a costly, unnecessary decision.
In hindsight, Shelly should have trusted her instincts.
Agreeing to her Son’s Request for Joint Accounts was a Hasty Decision that Required Research
After Sam died, Nathan convinced Shelly to add him as a joint account holder on all her non-registered accounts. He argued that it was an easy, no cost way to avoid probate. The accounts would not be frozen when she died, and the assets would not be subject to probate fees and taxes. While Shelly was very bright and fully cognizant, she was becoming increasingly vulnerable as she was visually and hearing impaired and confined to a wheelchair. She agreed to Nathan’s request for joint accounts and chose not to consult her accountant or financial planner.
Consultation with an advisor would have alerted Shelly to the risks of joint accounts and helped her weigh the pros and cons.
Shelly Sounded the Alarm and Hired a Professional POA When she Discovered her Accounts Were Depleted
Alarm bells started ringing when Shelly tried to arrange a fund transfer to her daughter to top up her TFSA, and discovered there was no money in her savings account. She expected the balance to be around $75,000. It turns out that over the course of six months, Nathan had transferred just under $20,000 to his personal account at the same bank, and over $80,000 to the investment arm of the same bank to accounts in his name only. While this was highly unethical, it was not illegal as being a joint account holder, Nathan had legal authority to withdraw the funds.
When you agree to joint accounts, the joint account holder has the same rights as you do.
As Shelly’s newly appointed attorney under an Enduring Power of Attorney (EPOA), we are in court proceedings to recover the money Nathan took and fight his claim that Shelly lacks mental capacity to change attorneys. Shelly has had to make tough decisions to address her son’s unethical actions and is hopeful the courts will force him to return the money so her other beneficiaries will someday receive the inheritance she intended.
3 Ways Shelly Could Have Avoided Trouble
Shelly needed help managing her financial affairs and put her trust in her son. What could she have done differently to protect her assets?
1. Consult A Trusted Advisor
Had Shelly done some research and consulted a trusted advisor about her decisions on who to appoint under an Enduring Power of Attorney and if joint accounts with her son was a good idea, she might have learned:
- The importance of assessing Nathan’s suitability to act as an attorney under an EPOA, by assessing his skills, reliability and integrity.
- Nathan can manage all Shelly’s financial affairs as attorney without her taking on the risk of allowing joint accounts,
- Nathan, as attorney, has a legal responsibility to prove he is acting in Shelly’s best interests, and is required to demonstrate this standard has been met.
- With a well thought through estate plan, there are other ways to avoid probate without the risk of joint accounts.
2. Appoint an Overseer
Shelly could have appointed a trusted contact to provide oversight of Nathan’s activities.
- Since both Shelly and Sam were suspicious of Nathan’s competency in the attorney role prior to Sam’s death, this would have been a wise thing to do.
- The trusted contact could have been a trusted family member or neutral advisor like a lawyer, accountant, or professional power of attorney (POA).
3. Hire An Impartial Professional Power of Attorney
Shelly could have engaged a professional POA to be appointed as the attorney under an EPOA instead of a family member.
- To avoid unpleasant family dynamics, many individuals choose a trust company or the services of a professional power of attorney to ensure their financial affairs are in the competent hands of an impartial professional.
Do Your Research, Consult With A Professional Advisor
Before you decide on joint accounts with your adult child to help you manage your financial affairs, take time to do your research. It’s hard to imagine a family member could betray your trust so readily as was the case for Shelly. Unfortunately, it happens more often than you think.
If you have joint accounts with one of your adult children, consider Shelly’s story. Could you find yourself facing similar challenges? I encourage you to weigh the benefits and risks with a trusted advisor.
Learn more about our Professional Executor and POA services. We make sure your wishes are honoured and your assets are distributed accurately, efficiently, and as you intended.
Jill Chambers
President and Founder, Financial Concierge Inc.
