You may have joint accounts, joint deeds or other joint assets. Many people, including most married couples, use joint ownership of their assets as their own self-made mini estate plan. You may be lucky and have joint ownership work to transfer assets upon your death. Or you may not be so lucky and be like many others for whom joint ownership does not work because you or one of your joint owners gets sued, gets sick, gets mad, gets greedy, dies in the wrong order or remarries.
What if a joint owner on my bank account or real estate gets sued?
Most of your joint accounts with banks and other financial institutions allow any joint owner full access to the entire balance in the account. Since any of your joint owners named on an account has full access to the account, so do your joint owners’ creditors. If one of your joint owners gets sued, his or her judgment creditor may garnish your account since your joint owner also owns that account. I saw one situation in which a woman lost her entire life savings held in joint bank accounts with her son because her son got sued, didn’t pay the judgment and was garnished.
Similarly with real estate, your joint owners’ creditors may place a tax or judgment liens on your real estate in order to secure payment of your joint owners’ debts. One example is a woman who named her children as joint owners on her home that was owned free and clear. I became involved after one of her daughters failed to pay Federal taxes and the IRS placed a huge tax lien on all of the daughter’s real estate, including the mother’s home. The mother and her other children joint owners ended up taking out a nearly $200,000 mortgage on the mother’s home in order to pay off the tax lien, so the mother could keep her home.
What if a joint owner of my real estate becomes sick and incapacitated and I want to sell?
If you are married, you may own your home jointly with your spouse, as most married couples do. If your spouse becomes mentally incapacitated and does not have appropriate financial powers of attorney, you may not be able to sell your home without a probate court appointed conservator and probate court approval. Upon the sale, the court may order that your spouse’s one-half share of the sale proceeds to be held in a separate conservatorship account for the care of your disabled spouse. You would then only have one-half of the proceeds to use to replace your home.
Do I have to pay off a joint owner of my real estate who gets mad and refuses to sign off on the sale papers without receiving his or her share of the proceeds?
You may have put your son’s name on the deed to your home after your spouse died, so that your son will get your home upon your death. This is usually accomplished by a deed recorded at the county register of deeds office. Generally, once the deed is recorded, it is considered a completed gift. You then meet someone else, fall in love, get married and want to sell the home to buy something else. You son does not like your new spouse and refuses to sign off on the sale unless he receives his half of the sale proceeds.
If this happens, you have few options. Upon sale of jointly owned real estate during your lifetime, every one of your joint owners is entitled to an undivided share of the proceeds. You cannot compel your son to sign off on the sale without giving him his half of the sale proceeds. In addition, your son does not get a principal residence income tax exemption for his share of the sale proceeds and would usually have to pay capital gains taxes on the entire gain.
What if a joint owner gets greedy?
The way most joint account agreements are written at banks and other financial institutions, any joint owner has the right to withdraw any amount from that account. Any joint owner can withdraw the entire balance of the account without the permission and/or consent of the other joint owners. With a husband and wife, that usually isn’t a problem because most married couples would want the other to be able to withdraw any funds out of any of their joint accounts for any reason.
However, your joint owner may be a child who is having financial difficulty. He or she may decide to “borrow” some of your money to help him or her out of the financial difficulty with every intent of paying it back, but typically can’t because of that same financial difficulty.
Or you may have a child that is just greedy. It is awfully tempting for some children to see your pile of money, that they can access, just sitting there doing nothing except earning income. A child may decide to clear out your accounts to get an inheritance early. Besides, you weren’t using it anyway.
Who gets the share of a joint owner who predeceases me?
You may have put all of your children on all of your accounts or real estate as joint owners with rights of survivorship, so in case of your death, your children could just split up those accounts or real estate. If one of your children predeceases you, upon your death, the accounts or real estate will get divided among the remaining children, because it is joint ownership with rights of survivorship. The children of your deceased child get nothing. By using joint ownership, you may be disinheriting your grandchildren.
What happens to my property if my spouse remarries and makes our property joint with the new spouse?
If your surviving spouse marries Thor or Bambi after your death, the new couple may make all of their property joint with one another. If your surviving spouse then predeceases the new and quite often younger spouse, all of your property which your surviving spouse held jointly with Thor or Bambi goes to Thor or Bambi. Your children may be disinherited if your spouse held all of your marital property jointly with Thor or Bambi.
I only recommend joint ownership as an exclusive estate planning tool if you can guarantee that one of your joint owners doesn’t get sued, doesn’t get sick, doesn’t get mad, doesn’t get greedy and doesn’t die in the wrong order. Joint ownership is not a substitute for a properly drafted estate plan which, at a minimum, includes financial and health care powers of attorney and a will, and often includes a revocable living trust. You can avoid these perils of joint ownership by eliminating your joint ownership and having a properly drafted will or trust based estate plan.
By: Matthew M. Wallace, CPA, JD
Published edited June 10, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Joint Ownership Fraught With Peril