Last week, we discussed financial powers of attorney and how they are increasingly being dishonored. You may think that you have the answer to the problem by using joint ownership. You may have been told by the teller that with joint ownership, your joint owner could pay your bills when you could no longer do so and after your death, they get the account.
Because of this advice, many people, including most married couples, use joint ownership of their assets as their own do-it-yourself mini estate plan. If all the stars line up just right, you might be lucky enough to have joint ownership work as intended and transfer the account upon your death. Or you may not be one of the lucky ones and be like many others for whom joint ownership backfires and does not work as intended 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 case we had was a widow who named her children as joint owners on her home that was owned free and clear. We became involved after a daughter failed to pay Federal taxes and the IRS placed a huge tax lien on all of the daughter’s real estate, including the Mom’s home. Mom and the other children joint owners ended up taking out a nearly $200,000 mortgage on the Mom’s home in order to pay off the tax lien, just so Mom 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 probate court appointed conservator and probate court approval. I have seen this happen. And upon the sale, half the proceeds would belong to your disabled spouse. The court would likely 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 or daughter’s name on the deed to your home, so that your child would get your home upon your death. This is usually accomplished by a deed recorded at the county register of deeds office. You may even had an attorney draft the deed. Generally, once the deed is recorded, it is considered a completed gift and all joint owners have a share in the home. I saw one situation like this in which after Mom had died, Dad had put son’s name on the house deed as a joint owner with Dad. Dad then meet someone, fell in love, got married and wanted to sell the home to in order to move to Florida and buy something else. Well, son did not like his new step-mom and refused to sign off on the sale unless he received his half of the sale proceeds.
Dad had few options. Upon sale of jointly owned real estate during lifetime, every joint owner is entitled to a share of the proceeds. Dad could not compel son to sign off on the sale without giving son half of the sale proceeds. So Dad sold the house and son received half of the proceeds. Dad was not too broken hearted when son received a 1099 for his share of the sale proceeds and had to pay capital gains taxes on son’s half of the gain because son did not get a principal residence income tax exclusion. That ended up as son’s inheritance, upon which he had to pay taxes. When Dad moved to Florida, he re-did his estate plan and left everything to, you guessed it, his new bride.
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 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 make withdrawals from your accounts to get an early inheritance. 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. We had one case in which Mom had done just that and put both daughters names on everything as joint owners, but then one of the daughters died. Had she left it like it was, she would have disinherited her grandchildren who were children of the deceased daughter. All of the joint accounts and real estate would have all gone to the surviving daughter, because it was joint ownership with rights of survivorship.
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 each other. 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 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. And of course, you can’t. 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 December 13, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Joint ownership fraught with peril