The pros and cons of opening a joint account with an aging parent

As people age, it’s not uncommon to need some help managing life’s responsibilities. But while there are many options for helping aging parents with activities of daily living (ADLs), such as in-home care or retirement communities, managing their finances can be a greater challenge. An aging parent may have a habit of overspending or buying things they don't need, which can put them at financial risk.

One way to help an aging parent manage their finances is by opening a joint bank account with them and using that account to cover their living expenses. Here, we break down the pros and cons of such an arrangement.

What is a joint account?

A joint account is simply a bank account over which multiple people have control. Regardless of the primary beneficiary of the account, a joint account holder can make deposits, withdrawals, or changes to the account. It's a simple way to get greater insight into a parent's spending and gain a little more control over their finances if they need that help.

Pros of opening a joint account with your aging parent

There are several reasons why opening a joint account with a parent may be a good idea.

Convenience in financial management

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One of the most compelling reasons is that it's simply much easier to manage an older parent's finances while they're living on a fixed income. You can consolidate your parent's assets into an account that's designed to help them cover their living expenses and set up automated payments for bills. This will help ensure they don't fall behind on financial responsibilities like paying a mortgage or a credit card balance, while also giving you the flexibility to pay for day-to-day necessities like medicine or groceries.

Moreover, having a joint account can make estate planning a little easier. After a parent's passing, you'll already have access to an account, reducing the number of hoops you'd have to jump through to access funds you're entitled to receive.

Monitoring and fraud prevention

If a parent is experiencing cognitive decline, they may become more prone to overspending accidentally or be more vulnerable to scams or other forms of elder financial abuse. With a joint account, you can keep a closer eye on how your parents are spending their money, so you can respond quickly when you see unusual activity like large purchases or money wired to external accounts.

Shared financial responsibility

Financial responsibility can be stressful for an aging parent. A joint account makes organizing finances and caregiving more accessible for an adult child, such as paying for in-home or nursing care.

Cons of opening a joint account with your aging parent

While opening a joint account may make sense for many families, it's not without drawbacks.

Financial risks for both parties

Whenever you join finances, whether it's with a parent, a child, a spouse, or anyone else, you inherit one another's risks. All parties are vulnerable to creditors if either experiences debt or bankruptcy. Moreover, if you move money in without fully understanding your parent's spending habits, you may risk losing your own money through a parent's unintentional misuse of funds.

Tax and legal complications

Depending on the type of account, the tax implications of a joint account with a parent may be significant. Interest earned is typically taxed, and as joint account holders, you're both responsible for that tax. For most checking or savings accounts, it won't be an exorbitant amount, but it's still important to note.

Perhaps more importantly, setting up a joint account may cause disputes with siblings or other heirs regarding the inheritance of account funds. When you open a new account, you should make sure that your parents’ will address this account and lay out precise instructions for how any remaining funds should be dispensed after their passing.

Eligibility risks

If your parent is on Medicaid, they must meet the income and asset eligibility requirements. Many older people move assets into a trust to remain eligible for Medicaid, but if you're setting up a well-funded joint account to cover a parent's living and care expenses in their name, it may disqualify them from federal benefits. Conversely, the account could also affect financial aid eligibility for tuition for grandchildren.

Alternatives to a joint account with an aging parent

Starting a joint account with a parent is a good way to conveniently manage their costs and help avoid overspending and other financial mistakes. However, it also carries financial risks, can create tax or legal complications, and may restrict eligibility for public programs like Medicaid or student loan financial aid. As such, let's explore some alternatives.

Power of attorney

Power of attorney is a legal designation that grants a designated agent legal authority to manage financial matters on behalf of someone else. Many families designate a power of attorney to plan ahead in the event that a parent becomes incapacitated or mentally unable to make financial decisions for themselves.

Signature authority

By adding an adult child as a signature authority to an account, they may make transactions without becoming an official co-owner. This protects them from any legal or financial liability resulting from account ownership while still allowing them some oversight over how the money is spent.

Payable on death (POD) provision

To reduce complications regarding inheritance, you may set up a POD provision, which ensures that account funds bypass probate and go directly to beneficiaries upon the parent's passing. You can do this with a joint account, too, provided all account owners agree.

Revocable living trust

A revocable trust allows an individual to set aside assets, like cash, property, or stock holdings, for specific beneficiaries while still maintaining control over the assets during their lifetime and receiving an income through the trust. Technically, assets are owned by the trust, which may help a parent meet eligibility requirements for Medicaid.

Direct deposit monitoring

An important financial responsibility is managing the parent's caregiving expenses. Elder care is extremely expensive, so most families choose to use a parent's accumulated funds rather than paying out of pocket themselves. By setting up a dedicated account in the child's name for caregiving expenses, you can fund it through regular deposits from the parent, simplifying care costs without overburdening family members.

FAQs

Should I open a joint bank account with my aging parent?

Opening a joint bank account is one way to manage your parent's finances and help cover their living and caregiving expenses. However, it also has tax and legal implications. Whether it's the right decision for you really depends on your specific situation.

Is it better to have a POA or joint bank account?

A power of attorney allows an adult child to make financial decisions on behalf of their parent if they become incapacitated while bypassing the legal and tax implications of having a joint account with an aging parent. It may make sense to discuss options with an experienced elder care advisor, elder law attorney, or financial advisor before making the decision to open a joint account with a parent. 

Can a nursing home take money from a joint account?

A nursing home can't simply pilfer money from a bank account, but it can accept dues and fees from a joint account.