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.

Example 1

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.

Example 2

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.

Custodial Accounts

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.

Conclusion

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.

 

 

 

 

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.

Example 1

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.

Example 2

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.

Custodial Accounts

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.

Conclusion

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.

 

 

 

 

 

New Jersey is one of the six states that has an inheritance tax.[1] This means that if you live in New Jersey (or if you own property in New Jersey), the beneficiaries of your estate may need to pay a tax depending on how much they inherit, what type of asset they inherit, and their relationship to you.

Who is exempt and who has to pay?

Class A beneficiaries are exempt from the inheritance tax. Class A beneficiaries are your spouse, children, stepchildren, grandchildren, parents, or grandparents. They do not have to pay an inheritance tax in New Jersey. This means that not all of your relatives are Class A beneficiaries. You may love your niece as a daughter, but she could be subject to an inheritance tax if you leave her a part of your estate in your Last Will & Testament or Revocable Living Trust.

Class C[2] includes your siblings and your son in law (or daughter in law). The first $25,000 is exempt, but anything more than that is subject to a tax that starts at 11% and is based on a graduated scale.

Class D beneficiaries include everyone else who is not in A, C, or E. Your nieces, nephews, friends, or significant other are Class D. There is a $500 exemption after which they have to pay at least 15% on any inheritance which is subject to the tax.

Class E beneficiaries are tax exempt entities such as charities. They do not have to pay an inheritance tax.

What Assets are Subject to the Inheritance Tax?
Most assets are subject to the inheritance tax including bank accounts, IRAs, real property, personal property. Life Insurance, however, is not subject to inheritance tax in New Jersey.

Notable Exceptions

Interestingly, Life Insurance is not subject to Inheritance Tax.  Payments from certain pension plans such as the New Jersey Public Employees Retirement System, the New Jersey Teachers’ Pension and Annuity Fund, and the New Jersey Police and Firemen’s Retirement System are not subject to Inheritance Tax. Also, in New Jersey, there is no inheritance tax on gifts made during lifetime so long as the gifts were made 3 years before death

How Does this Impact Your Planning?

Since not everyone is subject to an inheritance tax and among those who are, not everyone is subject to the same rate, it would be wise to consult with a specialized estate planning attorney when creating your estate plan so that you can maximize the amount of money going to your beneficiaries and minimize the amount going to taxes.  Additionally, it would be important for your beneficiaries to know who has to pay the inheritance tax – by making the estate pay the taxes out of the residue, it would make it  easier for the Executor to administer the estate as he or she can avoid chasing after the various non-Class A beneficiaries to pay up, but it also would mean that less money would go to the residuary beneficiaries.

Example:

Bob is a widower. He and his late wife never had children, but he has two siblings, two nephews, and three close friends who he would like to include in his Will. He would like to give his seven beneficiaries 1/7 of his total $500k estate.

Half of Bob’s estate comes from his life insurance policy; in which Bob had named his wife as the beneficiary but never updated it when she died, nor had he named any contingent beneficiaries. This means Bob’s estate became the beneficiary upon his death and his seven beneficiaries now have to pay inheritance taxes on their respective shares

Result: Each beneficiary inherits $71,428, but the siblings would only have $66,321 after taxes and the other beneficiaries would have $60,714 after taxes. Out of the $500,000 estate, $63,784 or 12.7% will go to the State.

What could Bob do differently?

If Bob goes to an estate planning attorney, the attorney can advise Bob that his beneficiaries are subject to an inheritance tax, and that his nephews and friends are subject to a greater tax than his siblings.

With this awareness, Bob can be more strategic in how he distributes his estate, can reduce the total amount paid in taxes, and can allow for each beneficiary to inherit more money.

Instead of splitting the estate in 7 equal parts, Bob can split his life insurance amongst his five class D beneficiaries, giving each one 20% of the policy. To make it up to his siblings, Bob can give each sibling 30% of his estate and divide the remaining 40% amongst the class D beneficiaries, giving each one 8% of the estate.

By doing this, each sibling will receive $69,500 instead of $66,321, and the nephews and friends will receive $67,000 each instead of $60,714. Out of the $500,000 estate, only $26,000 or 5.2% goes to taxes.

Conclusion

An estate planning attorney can help you achieve the best results for your beneficiaries. Not only would the attorney have advised Bob on proper titling of all probate and non-probate assets but could have helped ensure which beneficiaries inherit what amount and from where. Just splitting the estate equally might sound fair, but as you saw with Bob, it created a not so great outcome for all of his beneficiaries.

[1] Iowa is phasing its out and is set to be gone by 2025.

[2] Class B no longer exists.

 

Henry is a widower with three children. He wants his children to inherit in equal shares, and he hires a lawyer to create his Will.

The lawyer creates the Will using Henry’s instructions, and six weeks later, Henry signs in front of two witnesses and a notary.

The Will is valid, and as far as Henry is concerned, his work is over. When he dies, his children will inherit equally. Unfortunately, Henry did not understand that the Will applies only to probate assets, i.e those assets that go into the estate upon death. The will does not apply to his non-probate assets, assets that  bypass the Will because they automatically belong to someone else upon the owner’s death.

Henry did not discuss with his lawyer what arrangements he needs to make to ensure that all his assets flow the way he wants once he dies. He thought the Will was all that he needed.

What happens to Henry?

Five years later, Henry is having health issues and is struggling with his bills. He has the money, but he is tired, sleeps a lot, and does not always remember which bill is due when. Henry’s son Kevin creates a joint account with Henry, so that Kevin can pay his father’s bills for him.

Kevin does so, dutifully, until his father dies two years later.

Henry named his good friend Mark to be the executor of the estate. Mark knew that Henry had wanted his assets to be equally divided amongst his children. Unfortunately, Henry’s assets were not set up to allow for this.

While trying to administer the estate, Mark ran into three different problems.

Problem #1: The Joint Account

The joint account that Henry and Kevin both had access to had $50,000 in it when Henry died – money that Henry had put into the bank. Kevin’s siblings want him to share the money, as Henry’s Will states everything is to be split evenly.

Kevin refuses, stating that the money is legally his, as that is what the bank has told him. He is angry that his siblings did not do more to help him when their father was struggling, and he does not think they deserve the money.

The siblings go to Mark for help, but there is nothing Mark can do. The joint account is a non-probate asset, which means that the Will does not apply to it. as The account automatically belongs to Kevin once Henry has passed away.

Problem #2: The Life Insurance

When Henry was younger, he purchased  a life insurance policy for $100,000, and named his brother, Cory, as the beneficiary. When Henry got married and had children, he forgot to update  the beneficiary on the policy.   Therefore, when Henry died, the money went straight to Cory. Mark asks Cory to give the money to Henry’s children voluntarily, but Cory cannot because he owes a lot of back child support, and the government took takes the money as soon as it reaches his account.

Problem #3 The IRA

Henry also had an IRA (Individual Retirement Account) when he died. He had made his wife the beneficiary, but he never updated the policy when she died, nor did he name contingent beneficiaries. Mark was able to get the IRA into the Estate, so it could be shared amongst the three children, but this led to a poor tax consequence. When an estate inherits an IRA, it must be cashed out within five years.

If Henry had named his children as the beneficiaries, they could have stretched the payout over ten years, which would have allowed them to pay less in income taxes.

What could Henry have done differently?

If Henry had aligned his non-probate assets with his estate plan, his children would have inherited all his money equally in a tax efficient manner, as he intended when he created a will. Henry could have done several things differently to have a better outcome for his children.

Instead of having a joint account with Kevin, Henry could have appointed  Kevin his power of attorney, which would have allowed Kevin to help Henry with the bills without making Kevin an owner of the account.

Then, Henry could have made each of his children equal  beneficiaries of the joint account. The bank account would still have bypassed the Will, but it would have been allocated the way Henry wanted.

Additionally, Henry could have updated his life insurance policy and IRA , naming his wife as the primary beneficiary of each policy and his children as contingent beneficiaries, inheriting equally. Therefore, when Henry’s wife passed before him and there was no longer a primary beneficiary, the contingent beneficiaries were still in place to automatically inherit the policies upon Henry’s death.

When you are creating an estate plan, it is important to understand how that plan will treat your probate assets, and what you need to do with your non-probate assets to make sure they pass on the way you intend. It is essential  to review your estate plan each time you have a life event, and make sure that the designations on your accounts reflect how you want them to be distributed. It is also important to name contingent beneficiaries in case your primary beneficiary pre-deceases you. When working with an estate planning attorney, always be sure to discuss how to make changes to all your assets to ensure they align with your overall estate planning goals. Life is full of changes – make sure your estate plan and accounts don’t get left behind.