Families have a number of ways to share property with, or gift property to, family members. These arrangements are often useful and helpful; they are common and legitimate, but they can lead to problems in bankruptcy.
Parents will often place one or more of their adult children on a bank account as a joint tenant. This is useful because, if the parent falls ill and is incapacitated, the adult child can sign checks and keep payments on the house, car, utilities, and medical bills current. However, what if the adult child has financial trouble and has to file bankruptcy? Does the joint account become property of the bankruptcy estate? Can a bankruptcy trustee take money from the parent’s joint account?
The law recognizes the concept of a “convenience account”–a bank account where, as described, the parent puts the adult child on the account for convenience in case something happens to the parent. But bankruptcy law presumes that putting someone on a joint account constitutes a gift of all, or a part, of the money in the account. It’s up to the debtor–and his or her parent–to prove that the account was intended as a convenience, as a “just in case” precaution. What the bankruptcy courts look at is whether the adult child has taken any money out of the account without the direction of the parent, or whether the adult child has contributed money to the account. The more control the adult child exercises over the account, the more likely it is that a court will deem that account an asset of the adult child, and will allow the bankruptcy trustee take money out of the account.
If you are going to add an adult child to an account, or if you are going to add your name to your parent’s account, make sure you do these things: First, it’s a good idea to have the parent write a letter, explaining that he or she is adding to child to the account for convenience, and send that letter to the other children, another family member, or a lawyer. Then you have evidence that the intent was to make it a convenience account. Next, make sure the adult child never deposits money to the account, and never withdraws any money from the account, except in an emergency (to pay the bills when the parent is ill) or at the specific, written direction of the parent. It’s a bit more work to be specific in this way, but if you have thousands of dollars in the account, a little careful planning can protect the parent’s hard-earned money if the adult child has financial trouble.
In our next article, we’ll talk about the ways that parents help children financially that can backfire if the adult child ends up in bankruptcy.