I often have a client tell me that he or she is being advised by friends, or even a banker, to put the children's names on the accounts so, "they won't have any trouble" after the client's death. Clients request that I prepare a quit claim deed to the house for the same reason. This is often accompanied by scare stories about probate, and how the Court is going to take 1/3 to 1/2 of the estate.
When two or more names are placed on a bank account (or stocks, bonds, etc.), this generally results in joint ownership, also called "joint tenancy". Joint tenancy is also created when there are several names on a deed to real estate.
The benefits of joint ownership are real. However, joint ownership can create problems for which there are no good solutions.
The feature of joint ownership that avoids probate is called "survivorship". If one of the joint tenants dies, the survivor automatically owns the entire asset.
There are a number of problems and complications that can make joint ownership a poor substitute for a proper estate plan. Following are some of the things that can happen.
THE RACE TO THE BANK
There is no requirement that joint owners divide up the accounts equally. If there are several children placed on the joint accounts, one of the children could rush to the bank right after the funeral and draw out all of the money. Once the money has been withdrawn, there is no good way to require that the money be shared with the other children. At a minimum, this will cause hard feelings in the family and could even lead to a lawsuit. Language in your Will that all property be divided equally will not, necessarily, change the situation.
CLAIM OF CREDITORS
Because all joint owners have a present right to withdraw money from the account, the joint account can be available to creditors of your children. Assume that one child is sued by a creditor, or gets involved in a serious automobile accident and is sued for more than the policy limits of the insurance. If a judgment is entered, the judgment creditor has the right to have an examination, under oath, where your child is asked about all of his assets and the location of any bank accounts in which he has an interest. You would not have notice of any of this until your bank account was garnished. At that time, the account would be frozen, and your money would be turned over to the creditor, unless you appear in Court and succeed in getting the garnishment set aside. In the meantime, any outstanding checks are going to bounce. Your credit may be affected.
Creditors can also include the IRS, which may be able to assert tax liens against your property.
If someone with which you have a joint account files for bankruptcy, the joint account would have to be listed on bankruptcy schedules, which are public information and are available to all creditors. You may have to defend yourself in bankruptcy court against the claims of your child's creditors.
If your child should get divorced, that child will be required to disclose all assets to the spouse, including any interest in joint accounts. Under the wrong circumstances, the divorce court could regard these joint bank accounts as marital property, which is divided in the property settlement. Even if this does not actually cause you to lose your property, the fact that the joint accounts are taken into consideration by the divorce court could result in your son or daughter being short-changed in the property settlement.
OUT OF SEQUENCE DEATHS
While you expect your children to outlive you, this is not always the case. If the joint owner dies before you, the asset comes back to your estate which has to go to probate. The mix of probate and non-probate transfers could be different than what you intended.
Currently, the only government program that pays for long term nursing care is Medicaid. Transferring property into joint ownership with your children can be considered divestment under the Medicaid regulations. The penalties for divestment include disqualification from receiving benefits and you may have to sell property which is otherwise exempt to pay nursing home expenses. When you apply for Medicaid, there is a form which requires you to disclose, under oath, all transfers made within the previous five (5) years.
Another variation is where your child requires nursing home care. The joint bank account could be considered an asset of your child which is available to pay for nursing home expenses.
If the joint owner becomes disabled, the probate court may appoint a conservator to manage the disabled person's property. The conservator has to account to the court for all property of the ward, and usually has to post a bond. Your ability to use your own money may be subjected to court supervision. Also, the conservator might have the right to make withdrawals from the joint account for the benefit of the ward.
Joint property may not be appropriate between husband and wife if there are children from previous marriages. Children of the first spouse to die can be completely disinherited because they are not heirs of the surviving spouse, and will inherit nothing upon the death of the step-parent.
REAL ESTATE - SPECIAL PROBLEMS
Michigan law creates special problems with real estate, since the survivorship feature of jointly held real estate is said to be "indestructible". Each joint tenant has the chance to own the whole property if he outlives the other joint tenants. To protect this survivorship interest, the courts have said that joint property cannot be sold without the consent of all joint owners.
Also, each of the joint tenants has an unrestricted right to live in, and use, the entire property. This includes the right to rent out the property. Unfortunately, there are no hard and fast rules about sharing expenses, maintaining the property, and accounting for rents received. In one case, a son occupied the home after the parent's death. The son did not pay the property taxes, allowed the property to run down, and did not pay rent to any of his brothers or sisters.
The other children could not force the property to be sold without the consent of the child occupying the house. It is not even clear whether a court can require the son to pay the property taxes while he occupies the house. The other children are placed in the unenviable position of having to pay the property taxes with no chance of getting reimbursed, or to risk losing the property to a tax sale. The only way the other children will receive anything, is if they outlive the brother occupying the house. In cases such as this, the parent has traded the benefit of avoiding probate for a lifetime of conflict amongst her children.
When property is transferred at death, the heirs receive the benefit of a so-called "stepped up basis" for tax purposes. The house your father bought for $12,000 is worth $150,000 at his death. The stepped up basis lets you pay capital gains taxes using the date of death value as the basis for computing taxable gain. This advantage could be compromised by using joint tenancy.
There is also a Federal Gift Tax. If large amounts of money or property are transferred into joint tenancy, there could be gift tax consequences.
Joint property can be a very effective and inexpensive way to transfer property at death, if everything goes according to plan. But, joint ownership is very inflexible and unforseen developments can make this a very expensive substitute for a proper estate plan. There are better and safer ways to make sure that your heirs receive your property after your death.