Many people think that a good way to setup a bank account is by adding someone’s name to the account. Most of the time, this method is either recommended by someone at the bank, or one of your friends or neighbors. A lawyer will almost never recommend this method of transferring assets at death, because it’s not guaranteed to work. It might work, yes, but it might not. And do you really want to take a chance that it’s not going to work? Maybe you do, and maybe you don’t.

There are many, many problems with using this method to transfer money to another person if you die. One reason is just by adding someone’s name on your account doesn’t mean they’re going to get the money when you die. The reason is that an account which has the names of two people can be either a “joint account as tenants in common,” OR a “joint account with rights of survivorship,” OR a “convenience account.”

A “convenience account” means that a person adds the name of their son or daughter to the account just so they can write checks to pay your bills. And that’s it: they have no ownership rights to the money. So when you die, the money becomes part of your estate: it doesn’t go to the other person.

A “joint account with rights of survivorship” means that both persons on the account own all the money in the account, and when one person dies, the other person now owns all the money. And that’s what most people think will happen when they go to the bank and add someone else’s name to the account. But that’s not the way it works, because many times you or the person at the bank forgets, or doesn’t know, to check the box on the signature card or computer, and indicate whether it’s a “joint account with rights of survivorship,” a “joint account” which is owned 50/50 by the two people, or a “convenience account.” And by forgetting to check that box, now when you die that can cause all sorts of problems, because no one knows which type of account you intended when you put someone else’s name on the account.

And, except when it’s a convenience account, by adding someone else’s name on the account, under the IRS rules, you’re technically making a gift to the other person, and that may need to be reported to the IRS. The man or woman at the bank isn’t going to tell you that, because they’re not lawyers and they don’t know. If you setup the account as “joint tenants with rights of survivorship,” under the IRS rules you’ve just made a gift of 100% of the value of all money in the account. All of it, not half. The reason is that by adding someone else’s name to a survivorship account, they can, at any time, legally take out all the money in the bank and close the account. You know they’re not going to do that (hopefully), but the IRS doesn’t. You’ve just made a reportable gift to the other person of the entire value of the account, and that may or may not have tax consequences.

If you add someone’s name to an account and set it up 50/50, then under IRS rules you’ve just made a gift of half of the value of the account to the other person. This may or may not need to be reported to the IRS, and may or may not have tax consequences, either before you die, or after. How are you going to know?

Another problem with adding someone else’s name to your account because you want them to have the money when you die, is that it’s possible someone else, either another one of your children, or someone else you put in your will, can possibly claim that the amount of money in the “joint account” should come out of the share of your estate which was supposed to go to the joint account holder when you die. Here’s a simple example to explain: suppose you have an account at Chase or Citibank or Amalgamated or HSBC or M&T; wherever, and you put your daughter on the account as joint owner with rights of survivorship, and you have $10,000.00 in the bank, for example. Now in your Will, you have other money which is worth $100,000.00. This could be another bank account which is not joint, or an investment account, or life insurance where you don’t have a beneficiary, or proceeds from your pension plan, or proceeds from the sale of your co-op or condo; anything, which you leave 50/50 to your son and daughter and so each would get $50,000.00 under the terms of your Will. What can happen, possibly, is that your son is going to say “hey, my sister already got $10,000.00 from the bank account. That should come off of the $50,000.00 she gets under the Will. My mom wanted her estate to go 50/50 to me and my sister. Now she’s getting $10,000.00 more. That’s not fair. That’s not what my mom wanted.” Is your son going to say that? Probably not; it’s very unlikely that would happen. But it’s possible, especially if there’s bad blood between the two of them, and more especially if there’s a lot more money to be divided.

Another really big problem is when you add your son or daughter to the account, and the real reason you do so is so they can sign checks to pay your bills. So now when you die, the child on the account is going to claim the whole account belongs to them, and the other child is going to say it was a ‘convenience account’, only to write checks, and all of the money in the account is part of your estate. That happens all the time. All the time, and it causes real headaches.

Another reason is that sometimes people have two accounts, for example, each with $100,000.00, for example, and put their son’s name one one account, and the daughter’s on the other. Perfect, right? Well, maybe not. The reason that you get old, and forget you had this great plan to divide your money 50/50 between your son and daughter, but now you start using one account to pay your bills, and it goes down and down in value, while the other account stays at $100,000.00, and maybe makes a little bit of interest? Is that what you wanted? Probably not.

There are a lot more examples of why adding someone else’s name as joint owner of a bank account may not be effective to transfer money at death, or may cause tax problems, but I think you get the idea.

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