The last few weeks, we have been discussing deeds and how just a small change in the words can make a huge difference in the ownership interest conveyed by a deed. I regularly see deeds drafted by individuals who have attempted to do their own estate planning.
The reason that many of these individuals draft their own deed is because “It is something that I could do myself.” Inevitably in the cases I see, the deeds backfire and do not operate as intended. Today we will discuss some examples of what can happen when you try to do your own estate planning by using deeds.
In one case, a son brought in a deed after Dad’s death. It was a recorded quit claim deed drafted by the son and signed by Dad. The deed just listed Dad and all four kids without any qualifying language such as joint tenants or tenants in common. Without any qualifying language, the ownership interests were as tenants in common. As such, upon Dad’s death, Dad’s 20% interest did not automatically go to the kids. Dad’s 20% interest needed to be probated. I regularly see this type of problem deed.
If you are married, you may own your home with your spouse. As with most married couples, your home deed most likely lists you and your spouse as tenants by the entireties, which is like joint ownership with rights of survivorship between spouses. In just such a situation, a wife had an accident resulting in a closed head injury. She ended up in a nursing home and wouldn’t ever be coming home. The husband didn’t need the big house with its upkeep, maintenance and taxes and wanted to sell it to buy a condominium. This would give him a lot more time to spend at the nursing home with his wife. Unfortunately, the home was not in a trust and the wife did not have a financial power of attorney. The husband could not sell the home without going to probate court to have a conservator appointed to sign the wife’s name on the deed. The husband then had only half of the proceeds of the sale of the home to buy the new condominium because the court ordered the other half of the proceeds to be held in an account for the care of the wife.
I had another situation where Dad put the son’s name on the house deed after Mom died so in case something happened to Dad, the son would get the house. Well as luck would have it, Dad met someone, fell in love, got married and wanted to sell the house and move to Florida with his new wife. Son didn’t like his new step-mom. Son would not sign off on the house unless he got his half. Dad had signed and recorded a deed naming himself and his son as joint owners. There was nothing that I could do at that point. It was a completed gift. If the house was sold during Dad’s lifetime, the son was entitled to half of the proceeds. Well Dad sold the house, son signed off on the house and got his half. Dad and new step-mom then moved to Florida. I understand that Dad updated his estate plan and left it all to – new step-mom. The son’s inheritance was that half of the house.
Not only was that the son’s only inheritance, the son also had to pay capital gains taxes on the house sale proceeds. Dad didn’t have to pay taxes on the sale of his share of the home because it met the principal residence exemption of the Internal Revenue Code. However, it was not son’s principal residence. Son had to pay capital gain taxes on his proceeds over $5,000 since Dad had bought the house in the 1960’s for $10,000.
There was another situation in which Mom decided to do her own estate planning after Dad died by naming her two daughters as joint owners on all of her property. Daughter #1 then died. Mom came to my office and asked what would happen after her death. I told her that daughter #2 would get it all because she would be the survivor. Mom said that that’s not what she wanted because she wanted daughter #1’s children to get their mother’s share. Unfortunately, with joint owners with right of survivorship it is exactly that, if you do not survive, you get nothing. In that particular case, daughter #2 was a little more cooperative. We were able to change the ownership of all the property into a trust so that no matter who lived and who died, each daughter’s family would get half of Mom’s estate.
I had another case in which after Dad died, Mom put the three kids names on her house so in case something happened to her, the kids would get the house. Mom’s home was owned free and clear of any mortgage which Mom had paid off years ago. Well, one of the kids got into some tax difficulty and had a large tax lien filed against them. When that tax lien was filed against them it attached to all real estate that that child owned in the county, which happened to include Mom’s house. Mom and the other two kids had to take out a mortgage for nearly $200,000 to get rid of the tax lien just so Mom could stay in her own home. It cost nearly $200,000 to fix an improper deed. I could have done a lot of very good estate planning for a lot less than $200,000.
These are just a sampling of joint ownership deeds gone wrong. Because of this, you should be very careful about using joint ownership on deeds. I generally recommend that you only use joint ownership on deeds if you can guarantee that your joint owners do not get mad, do not get greedy, do not get sick, do not get sued, and do not die in the wrong order.
Also, just because you don’t want to pay a lawyer $100 or $200 to draft a deed, or because a deed is usually only one piece of paper, do not be tempted to draft a deed on your own. It is often much more expensive to fix an improperly prepared deed than it would have been to have it drafted correctly in the first place. Like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.”
By Matthew M. Wallace, CPA, JD
Published edited August 29, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Beware of joint ownership deeds gone wrong