Most banks will not allow minors to set up bank accounts by themselves. To get around this, many parents set up joint accounts with their children, so the child can deposit money they get from working, gifts, etc.
Joint accounts are easy to set up, but they may not be the best way to get your child access to a bank. They can expose the child and the parent to unnecessary risk.
Problems for the Child
A joint account is owned by both individuals 100%. This means that either the parent or the child can take all of the money out no matter who put in the money.
This means the child can be exposed to the parent’s creditors.
John is 15. He works at a retail store after school, and his mother, Sally, opens a joint account with him, so he can get his wages via direct deposit.
Unfortunately, Sally had some outstanding credit card debt. She ignored the summons from the credit card company; the company got a default judgment against her, and then went to court to get her bank account garnished.
There were insufficient funds in Sally’s account, so bank took the money from John’s account and gave it to the credit card company.
Unfortunately, John has no recourse. The bank was required to turn over the money as it was legally John’s AND Sally’s. John can only hope that his mother straightens out her finances and is able to pay him back in the future.
Problems for the Parent.
Most parents set up joint accounts with their child wherever they already do their banking. This exposes the parents’ other accounts.
Annie opened a joint account with her daughter, Marcia, when Marcia was 17 for her to put in money she was gifted from relatives. Annie occasionally sends $50 to her daughter for fun money, but Annie does not pay attention to this account and does not consider the money in the account to be hers.
When Marcia went to college, Marcia continued to use the joint account and never opened a solo one. Unfortunately, Marcia is spendthrift. She really likes to shop, and she spent more money than she had in her account.
Since the account was tied to one of Anne’s other account that served as an overdraft protection, this account was depleted due to Marcia’s excess spending. Annie was furious and complained to the bank, but she was out of luck. Because Annie was on Marcia’s account, she was liable for her daughter’s overspending.
Alternatives to a Joint Account.
Joint Accounts are the most common way for parents to set up accounts for their minor children, but they are not the only option. Here are two other options for parents who may not want to have a joint account with their child.
One option for parents is establishing a custodial bank account. With a custodial account, the child is the owner and primary beneficiary, but there is an adult (usually the parent but it can be a financial institution) who oversees the account until the child is 18 (or 21 in some states), which is when control of the account is given to the child.
The advantages here are that the parent’s money and the child’s money are separate, so the child is not exposed to the parent’s creditors, and the child cannot overdraw the account.
Neither John nor Annie would have been in trouble if they had custodial accounts instead of joint accounts.
Prepaid Debit Cards
Another alternative to a joint account is a reloadable pre-paid debit card.
Several institutions allow parents to set up pre-paid debit cards for their minor children.
No two cards, however, are exactly the same. Before signing up for one, the parents should review the terms carefully, and make sure they understand what their rights and obligations are with that institution.
For example, some cards offer parental monitoring and control or are designed to teach the child how to save and invest wisely. Usually, these features come with a monthly fee.
If the parent prefers to be more hands-off approach, there are a number of cards that are free to use, but do not offer parental monitoring, so the child is left to his or her own devices.
In addition to the ability to control or monitor the child’s spending, parents should also consider if the card offers overdraft or fraud protection.
Be aware that some institutions do require the parent to also have an account if the minor child is to have his or her own debit card; this could expose the parent to the same risk that a joint account would.
There are different options for parents who want to help their child better access his or her money. A joint account is often used by married couples and generally are preferred in such situations. However, there could be problems when owned by parents together with children so it is worth exploring your option to see what works best for you and your family.