This week is our last column in the series on real estate and deeds. We have covered a lot of ground in the last six weeks (pun intended). We first discussed the different types of deeds and ownership interests. We followed that up with information about multiple owners’ rights and responsibilities and the different elements of a deed. Last week, we discussed the importance of recording deeds. Today we will discuss real estate joint ownership and the unintended consequences which can occur when you use joint ownership as your own mini estate plan, instead of planning with a will or trust.
If all the stars line up just right, you might be lucky enough to have joint ownership work as intended and transfer the real estate upon your death. Or you may be one of the not so 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. remarries or divorces.
What if a joint owner of your real estate gets sued?
Your joint owners’ creditors may place 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 in St. Clair County, including Mom’s home. Mom and the other children joint owners ended up having to take out a nearly $200,000 mortgage on Mom’s home in order to pay off the tax lien, just so Mom could keep her home that she already paid for once.
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 you or your spouse becomes mentally incapacitated and does not have appropriate financial powers of attorney, the well spouse may not be able to sell the home without a probate court appointed conservator and probate court approval. We had this case come through our office. Upon the sale, since half the proceeds would belong to the disabled spouse, the court ordered that the disabled spouse’s one-half share of the sale proceeds be held in a separate conservatorship account for the care of the disabled spouse. The well spouse only had one-half of the proceeds to use to replace the 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.
We had one situation like this come through our office in which after Mom had died, Dad had put son’s name on the house deed as a joint owner with Dad. Dad then met someone, fell in love, got married and wanted to sell the home to in order to move to Florida with his new bride. 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 $60,000, which was half of the $120,000 sale proceeds. Dad was not too broken hearted when son received a 1099 for his half of the sale proceeds. Dad had bought the house in the 1960’s for $10,000 and had a $110,000 capital gain on the sale. Son had to pay capital gains taxes on $55,000 gain because son did not get a principal residence income tax exclusion. When Dad moved to Florida, he re-did his estate plan and left everything to, you guessed it, his new bride. The home proceeds ended up as son’s inheritance, upon which he had to pay taxes.
Who gets the share of a joint owner who predeceases me?
You may have put all of your children on your real estate as joint owners with rights of survivorship, so in case of your death, your children could just split up the 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 her deceased daughter. All of the joint 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 their 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 their 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 would be disinherited.
What happens if I inadvertently draft a tenants in common deed instead of a joint tenants deed?
You may have added your four kids to your deed with you when you purchased the property or did your own quit claim deed adding your four children to the deed with you. Without any qualifying language, it is considered tenants in common with you and each child having a one-fifth or 20% interest. Upon your death, your 20% share would not automatically go to the children. Your share would need to be probated.
And because your share went through probate, it would be subject to Medicaid estate recovery. If you had been in a nursing home being paid for by Medicaid, the state would have a claim against the house to reimburse the state for Medicaid payments made on your behalf.
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 hazards 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 January 29, 2017 in The Times Herald newspaper Port Huron, Michigan as: Joint ownership of real estate can be hazardous