Joint bank account with a child or parent? You might want to close it.
In recent years, more and more older people have decided to open a joint bank account with one of their adult children.
It’s easy to see the thinking behind it. If you’re getting older or you’re not in the good health you once were, a joint account appears to be a simple way of letting your child access your money on your behalf. In this way, they do the work and you don’t have to worry about getting to your local branch or faffing about with internet or telephone banking.
So far, so good. But what most people don’t realise is that these joint accounts could be storing up trouble for the future.
Problems emerge when a parent either loses their mental capacity or dies. When either of these things happen, a huge legal question mark emerges over the authority the child has to carry on managing the joint bank account, and who has actual ownership of the funds.
Whose money is it anyway?
Normally, when a joint bank account holder dies, the money in the account passes to the other account holder. If this person is a spouse, it doesn’t often create problems. But if this person is one of a number of children, it can be a financial nightmare.
This is because the whole account passes to the child who is the co-holder. Even if the parent has made a Will that stipulates that the money in the joint bank account should be shared among three children, the child who is co-owner of the account is perfectly entitled to keep it all. If they do, disputes among your children are sure to happen.
So, if you want to share your money among your children, don’t make only one of them a joint account holder. It’s just asking for trouble!
What about Inheritance Tax
“Hang on,” you may be thinking, “surely a joint bank account is a good way of getting out of paying Inheritance Tax?”
Again, I’ve got bad news for you. If you put all the capital into the account, the money officially belongs to you, not the child who is co-holder of the account. This means that every penny still has to be included in the value of your estate for Inheritance Tax purposes.
Also, if your child decides to make any cash withdrawals for themselves, any money they take out in excess of the money they have put in (if any) will almost certainly count as a gift from you to them. This also has consequences for Inheritance Tax and also for their own Income Tax.
Then there’s the problem of unauthorised withdrawals. If the child who is co-signatory helps themselves to a lump sum, it’s almost impossible to prove the withdrawal was unauthorised. If this happens, it could mean your other children miss out and become unable to claim their fair share of your money.
What’s the alternative?
It’s not hard to see that holding a joint account with a child can be a dangerous move, both for you and any other children you may have. So how can you solve this problem?
By far the best way is to draw up a Lasting Power of Attorney for one or more of your children. This allows them to make decisions about your property or financial affairs if you become incapacitated. They have to act in your best interests, and the terms of Will won’t be undermined by one child having claim on your money by virtue of holding a joint account with you.
» Further reading: My own experience of setting up a Lasting Power of Attorney.
» Help & advice: Inheritance Tax Planning