Careful Whom You Add To Accounts
Banking Law on June 13, 2013
Various types of bank accounts held in the name of a single individual or entity have the virtue of simplicity, and the added bonus that the account holder does not have to wait to make decisions until after a consensus has been reached with others. But sometimes other considerations make it desirable to add someone else, usually a relative, to an account.
That is a perfectly reasonable step to take, but it is important to consider the ramifications, especially as it may affect federal deposit insurance for accounts insured by the Federal Deposit Insurance Corporation (FDIC). Of course, another overriding consideration having more to do with human nature than federal regulations is whether there is a trusting relationship between or among everyone whose name is on an account.
Joint Bank Accounts
Under FDIC rules, a joint account is a deposit account owned by two or more people who have equal rights to withdraw all of the deposits and to close an account. Married couples, assuming they want to share the funds in the account, like the convenience of such a joint account so that either person can write checks on the account and pay bills from it. At an FDIC-insured institution, each co-owner is insured for up to $250,000 for his or her share in all joint accounts in that institution. But if all persons on the account do not have equal withdrawal rights, the account will not necessarily be FDIC insured up to the same amount as for a true joint account under FDIC rules.
If the goal is to give someone limited access to a bank account when needed but not to grant ownership rights to the account, an alternative is to grant that person a power of attorney. Powers of attorney, which typically authorize someone to represent or act on another’s behalf in financial matters, can be crafted to permit the desired amount of access to bank accounts.
The various states and banking institutions have their own rules and procedures for access to safe-deposit boxes. Since granting a second person access to a safe-deposit box amounts to giving that person the right to empty the box without the need for anyone else’s approval, this is a step that should be taken only with care and forethought.
Credit Card Accounts
There are two different ways to give a second person the ability to use a credit card. Making that person a co-owner means that he or she will be financially responsible for all of the debt incurred with the credit card, regardless of which co-owner authorized a particular charge. In the alternative, an authorized user of the card may or may not be financially responsible for the debt, depending on the cardholder agreement. The card owner can put restrictions on authorized users, such as how much debt the authorized user can incur with the card.
Succinctly put, a cosignor on a loan has agreed that the creditor can look to him or her for satisfaction of the debt if the debtor does not pay the debt. This obligation may well extend to any late fees and collection costs made necessary by the debtor’s delinquency. On top of that, the cosignor’s own credit rating could take a hit if the debtor doesn’t pay the debt or pays it late. All in all, the watchwords for cosigning on a loan are “proceed with caution.”