Why you should NEVER add someone onto your accounts (other than a spouse)

Today, we'll be discussing whether you should add someone onto your financial accounts. Hello, welcome to Money Talks. My name is Ken Wink from Summit Financial Consulting here in Southeastern Michigan. If you'd like more info about what you hear during the show today, give us a call, 586-226-2100. Or you can visit us on the web, summitfc.net. While you're at the website, be sure to check out that podcast page. You can look at our past shows and you can also subscribe. on Apple Podcasts, Spotify or Amazon Music. So let me start the show by saying it's OK to add your spouse onto an investment account or a bank account. It makes sense in a lot of cases for practicality. However, there are very, very few situations where you should add someone other than your spouse onto an account. Today, we're going to explain why. Before we jump in, let me introduce my co-host, Tony Shore. Tony, if I added you to my bank accounts, and you know I trust you with my life, would I see any unexpected purchases on the debit card, or would it go completely smooth?

I know you would see purchases from record stores down in the Valley Records, probably Amoeba Records. There might be a few Amazon charges. Sure. Sure. I mean, you give me access to that kind of money. My record collection would double. I mean, come on. No, I'm kidding. I wouldn't want that responsibility. I wouldn't let you put me on your account, right? But I trust myself, so it wouldn't matter, I guess. But I don't want the responsibility in case there was a charge that you didn't understand. And it's like, well, Tony's on the account. That must be him. I'll be serious. I want to avoid the appearance, even the appearance of evil. Right. And that's what we should all be. You can trust me, Ken, with your money. But I hope you never have to. Right. That's kind of I hope people can trust me. But I don't I don't want that responsibility. And that's it. You have that responsibility with a lot of people. I mean, you don't, you're not actually holding their money. There's a third party custodian. And so there's that layer of protection and it's usually a big one like Charles Schwab or Fidelity or somebody that's a custodian over your client's money. So it's not like you have access to it anyway, but you're right. Giving people access to your money is a recipe for disaster. And even if it's family typically, right?

Right. Yeah. We run into situations all the time where people are just getting older and they figure, you know what, just for ease, I'm going to add my adult child onto my account or onto my bank account so that if they need money for something, if they're incapacitated, it's really easy for them to assist with that. We're here today to say that we do not typically recommend that and I'll explain why, but I'm gonna start off with a real life story just to illustrate why it's typically not a good idea to add someone onto your account. So in this example, it's a client that has an investment account, but bank accounts really have the same pitfalls as what I'm about to describe. So just think both investment accounts and bank accounts. So a client added his oldest daughter to his $650,000 brokerage account as a joint owner. Wow. And again, this is, he trusts her with his life.

Sure.

No, she's not going to go in and take money from his investment account. It's just, you know, if I start to have some cognitive decline or if I'm in a pinch, or even when he passes away, it's a way to transfer those assets over to her upon his death, maybe a little bit faster because she's already the joint owner. So his heart's in the right place. You know, so basically his goal is if anything happens to me, she can pay the bills. She can manage the house. We don't have to worry about probate. It's simple. It's logical and it's efficient until last week. So his daughter was involved in a serious accident, in a serious car accident. So because her name's on the account as joint owner, the lawyers for the other driver moved to freeze the entire $650,000 instantly. Hmm. So now dad liability. Yes. So now dad can't pay his property taxes. He can't withdraw money to help cover medical expenses that have popped up, you know, and he's saying that's my life savings. She didn't put a dime towards my life savings, but because she was listed on the account, the other attorney was able to completely lock up all the money and we, the case hasn't resolved yet, but there's a chance that they're going to go after that money and they're going to be able to take all that money. So now dad's really, really out of luck.

Wow. So that's OK. That's a that is a good reason not to put somebody on the account, because I will admit I have almost I have a similar situation in that not with the accident and the lawyers, but my dad is cognitive abilities have declined. He's in full time care. So is my mom. They can't communicate properly. So he went in with me and we had my name put on his checking account where his money comes in social security so I can pay his bills easier. And I also have financial power of attorney, right? So I guess I could have just stuck with that. You're saying that's maybe a bad idea that my name is on that account because then if something were to happen to me, people or someone sued me, they could go after his money, right?

That's right. Yeah. So my next one is that one of the main reasons that is one of the main reasons. So I know we were talking before the show. If you get added to a bank account that only has a little bit of money in it, that's OK, because the only thing that's at risk is that little bit of money. Sure.

There isn't a huge amount. It's not like hundreds of thousands of dollars like that situation. It's his checking account. So it's not. Yeah, it's not investments or anything.

Right, yeah, investments, big bank accounts, that's where we run into a big problem potentially. There's potentially liability exposure there. Got another question for you. What percentage of marriages end in divorce? Almost 50% I've heard, right? Is that close? I saw some stats from a couple of years ago where it said if it's a first marriage, there's about a 50% chance of a divorce.

Yeah.

If it's a second marriage, it's up to just about 60% chance of divorce. And then a third marriage, it's almost 70% chance of divorce. Yikes. So I don't bring up these stats to pick on divorced people because tons of people are.

Things happen. Yeah.

Yeah, but let's just say you add your daughter onto your investment account and then she experiences a nasty divorce and that ex-son-in-law that you just can't stand. He decides he wants to absolutely go for everything. He gets his attorney involved. They do discovery and find that she's listed on your bank accounts or your investment accounts that ex-son-in-law could potentially be entitled to half. Wow. Okay. That's another big reason.

Wow. Yeah, that's huge.

Whenever there's commingling of funds, like if the daughter was doing some activity in the account, maybe she pulled out, you know, put some, the dad was being nice and said, you know what, pay for that Disney vacation from that account that we're on. You know, once an attorney can see that there's been commingling of funds and they've been used by both parties, they can make a case that that is the daughter's asset and therefore it should be an asset that's considered for the divorce.

So that's maybe an extreme example.

But what we want to point out today is that when you add someone onto your account, you are exposing your monies to liability from divorces, from car accidents, from lawsuits, from bankruptcy, from medical bills. All of these are issues that can potentially cause big problems for your account if you list someone other than a spouse as a joint owner.

Wow. Okay. That's interesting. So obviously those are two big reasons right there. Divorce, car accident liability, lawsuits.

Yeah. Well, and there's a hidden tax trap too within this. So in my original example where the dad added the daughter onto the account that had $650,000 in it, he had a ton of stocks in there and mutual funds that were highly appreciated in value. Sure. A lot of interest earned. A lot of interest earned.

The beauty of compounding interest.

That's right.

You're not going to tell us there's a negative side to compounding interest.

The only negative is if you add someone onto your account. So the way tax law stands today is that if someone passes away with money inside a non-retirement account, so I'm not talking about a 401(k) here, I'm just talking about a regular investment account, a brokerage account. Sure. When someone passes away, according to current tax law, that money passes 100% tax-free to the beneficiaries. It's called the step-up in cost basis. So here's the problem. You add someone onto the account, her half of the account no longer gets the step-up in cost basis. Ah. So now when he passes away, eventually she potentially subjected herself to tens of thousands of dollars of tax that she didn't have to, if she would have just kept her name off the account.

She'd have to pay the capital gains tax and the taxes and the step up in basis is awesome because it eliminates tax. But if you're on the account and you're still living, you don't get that step up in basis.

He tried to save her from probate court and all he did is hand her a massive tax bill and then a massive liability to himself. Right, right.

And so what's the solution here? Is it will setting up a trust instead and having a beneficiary designation on that instead of adding a name onto the account, have them as a beneficiary and or have a trust as a beneficiary and it goes into a trust?

Exactly right, Tony. Yeah. If you add a beneficiary directly, especially if it's a trust or a human, then you're going to get that step up in cost basis. So it's going to be a tax free transfer now. What we would call the safe duo is to instead do what you mentioned earlier, which is have a power of attorney on the account. When someone has a power of attorney, it gives them the legal right to manage the account just like the legal owner. But now creditors can't touch it. It can't be attacked by lawsuits. Right. Yeah, there you go. So that's the way to do it. But you got to remember, once the person passes away, now the power of attorney is no help at all. That power of attorney only works while the person is alive. So that's where you need either a transfer on death designation or a trust that can be...

So I already had the financial power of attorney from my mother and father. So because I had that, I wouldn't have had to have myself added to his checking account because I can already...

There's arguably no additional benefit to adding you onto the account, but it does add... in our opinion, a lot of liability. And I got to mention, we're not estate planning attorneys. We do have teammates and referrals that we can send people to.

Of course. Yeah. You work alongside estate planning attorneys to handle this aspect for your clients because Because everything we're talking about and everything involved with powers of attorney, trusts, estate planning, that all ties into your overall financial picture, your retirement plans, your income plans, your investments. It all needs to you have to have a quarterback or a coach that's looking at the big picture that includes all of it. Health care, estate planning. Retirement income planning, stocks, markets, insurance. Right. And that's you have everything there at Summit Financial Consulting. You have tax people and tax professionals that can help with the tax planning and you have Medicare specialists. So I think that's fantastic that you work with. I think that's fantastic.

Yeah, give us a call, 586-226-2100. We'd love to sit down with you and look at how you have everything set up right now. Just give it a second set of eyes from our attorneys, from our healthcare professionals, from our tax team, from our auto and homeowners insurance team. Make sure that your liabilities are appropriate on all of your different policies. A lot of people shop auto and homeowners insurance just from price, but it's important to make sure that you have proper protection as well. We're gonna do a show about that in a couple of weeks. But yeah, you definitely want to have somebody quarterbacking, in my opinion, who's a fiduciary, who will look at your entire estate and come up with a comprehensive game plan for you.

Exactly. You need to work with a trusted financial services professional who is a fiduciary. And that means they are held accountable to do recommendations that are in your best interests and not to recommend things that are not in your best interest for your personal situation and goals. And that's the difference. You don't want cookie cutter approaches. You don't want somebody who just wants wants to put your money in the stock market or just wants to sell you insurance because those typically aren't fiduciaries. They aren't looking at the big picture. They're not looking out for your best interest. They are an insurance salesman, so that's all they want to do. And it's like my dad always told me, Ken, if all you have is a hammer, everything looks like a nail. He always said that to me. He goes, if all you have is a hammer, son, everything looks like a nail. And, you know, you can't, you know, I remember one time and he used that analogy and it was more literal when he first told me that. It wasn't an allegory like we're using now. It was literal because I had a screw, but I didn't have access to a screwdriver and I was going to hammer it in with the, hammer a screw in with a hammer. And he pulls the hammer away. Uh-uh. And he said, son, when all you have is a hammer, everything looks like a nail. That is he's a wise man. Right. Right. He didn't come up with that one. I've heard it from other people as well. But my dad told me that when I was young and I'll never forget it. That's the first time I heard it.

So I just had a meeting yesterday with a client where they they had a bunch of health insurance that was expiring. It was a term life insurance policy. And they were saying, you know, we talked to three different people and we got three different answers on whether we need life insurance or not. And I guessed correctly. I said, well, I bet the people saying you needed it were the people that sell it and were going to get a commission off of it. And the people who weren't going to get a commission felt that you had enough in assets and you didn't need the life insurance. And they said, that's exactly what happened. So, yeah, it goes back to that analogy being true that you got to be careful who you're talking to.

Yeah. And if a financial advisor ever tells you you never, ever want to... you know, have money at risk in the market, or you never ever want to have cash value life insurance, or you never ever ever want to have an annuity, what that tells you is they're not willing to look at all the tools in the toolbox. You have to say for my, and now if they tell you your personal situation, this is probably the worst thing you could do because of, and here's the math. And it's not because they're, you know, they're a stockbroker and they want to put all your money in the stock market. They're an investment. They're an investment firm. So they just want to invest your money. They're going to tell you, oh, you can't ever put any money in insurance or annuities. And the guy that's just selling an insurance and annuities is saying, oh, you know, you need to move that. That's too much risk in the market. Move it all over and do it. Those are those are you got to question that. And that's why I love Summit Financial, because you are fiduciaries. You look at what you have to. You're held accountable. You're audited by the state. And they come in and they will audit you and make sure and look at all your communication with clients saying, OK, was everything you recommended in their best interest for their situation? And I think that's a big, important distinction that a lot of people don't understand. Right.

Yep. I agree 100 percent. And yeah, in Michigan, it's surprising how many financial advisors are not fiduciaries. Uh, they will say that the ones they are, they say they are too. They say they are all the time. Like I'm literally running into this almost every day where people are telling me, yeah, my current financial advisor says he's a fiduciary. And then we look them up and he's, he's not, they're held up to the suitability standard and suitability standards can be worked around, uh,

Yeah, you have to. You're not a fiduciary unless you have that licensure, unless you've gone through that and you're held to those accountability standards and are audited. And to say you are and aren't, that's really disingenuous. You got to watch out for that. And it's sad. It gives the industry a bad name. But I know a lot of. true financial services professionals like yourself that are fiduciaries that really care about their clients. And they do look at the big picture. And, you know, I've worked with them across the United States. And, you know, the problem is, is out of every 300 I've met, you know, I'm like, Oh, these 10 are really doing a good job. It's like, that's not a good percentage. Uh, but there are good ones out there and you can find them. So yeah, that's what you need to find. Well, Ken, a great show. I mean, uh, this is one that, uh, I think people needed to hear. Um, I had never, um, I'd never thought about that, honestly. And I've been doing this a long time. And that's interesting. I know also with inheritance, you think, oh, the names on the bank account, that's going to solve everything. It doesn't. But power of attorney is very helpful for when they're alive. And then transfer or payable on death or transfer on death for property and things. I know that was helpful when my grandfather passed. So estate planning ties into all of it, doesn't it?

Yeah, and you don't have to get a full estate plan, like just getting power of attorney and patient advocate documents. It's normally, I mean, what we see, $75 or $150.

It's simple and inexpensive to get powers of attorney, and everybody should have them, right?

Yeah, absolutely.

I mean, you recommend that all your clients and people you work with have them, so...

Yeah, if you're medically incapacitated or mentally, financially incapacitated, you got to have these documents in place. So yeah, we absolutely recommend them for everyone. And if somebody would like to talk to us, we do have access to attorneys through our attorney network in all 50 states. Wow, that's great. So I highly recommend people reach out to us. You can give us a call at 586-226-2100 or visit us online at summitfc.net. All right.

Great show today, Ken. And listeners and viewers, that does it for today's episode of Money Talks with Summit Financial Consulting, LLC, and our host, the man himself, Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.