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Jointly Held Property: Good or Bad Idea?

A frequent question that comes to us as lawyers is whether or not it is a good idea to maintain jointly held property. The context of these issues often relate to situations where parents want to put their children’s name on their bank accounts or where siblings hold real estate jointly that once belonged to parents. These questions about jointly held property come up with regard to all different types of property such as investment accounts, bank account, real property and even interests in debt where a party or parties are owed money pursuant to a promissory note. Frequently the parties involved want to avoid the “problems” of probate or save the costs associated with vising with an attorney and having a proper plan prepared.

Rights of Survivorship or Tenants in Common

Jointly held property can be held in a number of different ways. For example two people could own property in a way that provides that ,upon the death of one of them, their interest is then transferred to the other owner. This is known as survivorship.

On the other hand, two parties could own property jointly where there is not survivorship component. Where property is held in that fashion one party’s interest in the property transfers to their estate upon their death. The property would then be owned by the original surviving member and the deceased person’s estate.

Property held with and without a survivorship component can present both problems and benefits. In the case of property transferred to a surviving owner, the transfer avoids probate which might be a good thing under certain circumstances. Unfortunately however, avoiding probate might also cause unintended consequences which can cause serious problems.

A factual scenario might help illustrate how these problems might come up: A parent of two adult children attempts to do some estate planning at age 60. The parent, after consulting with her friends, concludes that the best way to provide for her two adult children at her death is to put her children’s names on her bank account and home. As part of her “plan” she decides to put her daughter’s name on her home which has a value of about $100,000 and her son’s name on her bank account which also has roughly the same value.

Unfortunately she has some health problems between when she completed her “estate plan” and the time when she dies at the age of 75. During that period of time she was able to retain ownership in the home and even did some improvements having spent about $15,000 of her savings to put on a sun porch which she enjoyed using every day. These improvements and the market caused the home’s value to rise to $150,000.00 when she died. Her bank account did not do so well. Besides spending some money do put the sun porch on the home, she also withdrew a considerable amount of her liquid assets to pay for medical expenses and other living expenses. At the time of her death her bank account only had $25,000.00 left.

The problem with this fact scenario is fairly obvious. The parent intended for both her son and daughter to receive an equal share of her estate when she put her plan in place at the age of 60. Instead the daughter will be receiving the real estate worth $150,000 and the son will be receiving the remaining only $25,000.00. Although the mother avoided probate and the costs of doing a proper estate plan, she may have unintentionally caused conflict and hard feelings in the family that may last generations.

This fact scenario only demonstrates one of the problems with jointly held property. More problems are discussed below.

Individual Liability Problems

Money RollsAnother problem that we come across involve the liabilities owed by one of the parties owning jointly held property. For example, this often comes up in the situation where a parent puts children on their bank accounts or home to avoid probate. In that situation the debts of the child, whether from failed businesses, personal debts or lawsuits can result in a loss of the parent’s asset. Essentially the parent’s money or asset is taken or sold, as the case may be, to pay off the debts of the children.

The thought of losing one’s savings or home at a time when they would be unable to recoup those losses through employment or business activity is terrifying to say the least. The impact on the person losing assets in these situations is frequently lasting and may not be recoverable.

Tax Considerations

A similar problem occurs with respect to tax issues. Jointly held property can easily become ensnared in a state or federal tax problem when either the IRS or the state files a tax lien against all property owned by one of the joint owners. In that case the taxing agencies do not care how much of the original parcel was owned by the taxpayer. They also do not care how much of the property was purchased by the taxpayer or how the taxpayer’s name came to be on the property. The taxing authority only wants its money and will not release title on the property until all or at least some portion of the taxes have been paid.

Tax issues typical come up when the parties decide to sell the parcel and a title search is done as part of the due diligence necessary to complete the transaction. The inability to resolve the tax problem quickly can sometimes cost a deal when a potential purchaser simply does not want to wait for the problem to be resolved.

Risk v Benefit

The decision to hold property must be analyzed from a risk versus benefit perspective. If the goal of holding the property jointly is to avoid probate and the legal fees associated with a properly prepared estate plan, the risks of doing so frequently outweigh those costs. Even an estate plan which costs thousands of dollars would seem cheap when compared to the possibility of losing half a home or half of one’s life savings to the liabilities of another. It is for these reasons that we almost never recommend that parties hold property jointly in their own names. There are much less risky alternatives available to those who do some planning to avoid potential liabilities.

Obviously the choice to hold real property must be made by the individuals themselves. The real estate, estate planning and litigation attorneys at Penzien & McBride are available to review your situation and make recommendations regarding an appropriate way to hold your property. Our firm practices throughout the State of Michigan but especially in the Macomb, St. Clair and Oakland County areas. The attorneys can be reached at (586) 690-4400 or by completing our contact us form.