Legal Tip 246: Strategy - Use of tenants in Common Ownership to Protect Children

When a joint tenant owner dies their share of the property passes to the other surviving owners. There is no opportunity to deal with the property via their will.

See

Legal Tip 245: The Two Ways to Jointly Own Property – Joint Tenancy v Tenants in Common Legal Tip 245: The Two Ways to Jointly Own Property – Joint Tenancy v Tenants in Common


This can lead to some asset protection risk if:

a) The surviving spouse re-partners

b) The surviving spouse later has other children

c) The surviving spouse becomes bankrupt


Example

Homer and Marge are happily married and have 3 kids. Marge dies.

Because their property and investment property are both owned as Joint Tenants they pass to Homer on Marge’s death- no matter what Marge’s will says.


Homer now as sole owner starts a risky business while seeing his new girlfriend Edna.

Homer marries Edna and has a 4th child.

Homer is tinkering on bankruptcy as well as suffering medically.

If Homer does

- His new spouse has a claim on the whole of the 2 properties

- His new kid essentially gets a share of Marge’s half of the 2 properties either by Homer’s will or a Family Provision claim.

If he were to go bankrupt Homer would potentially lose 100% of the 2 properties.


The way to avoid these sorts of situations is by owning properties as tenants in common. That way the share of the deceased can pass via their wills


Example

Marge’s will stated that all of her assets were to be shared equally by her children.

If she had owned the properties as Tenants in Common 50/50 with Homer then on her death

a) 50% of both properties would have passed to her kids

b) Homer’s new kid would only have a claim on 50% of these properties – Homer’s share

c) Same with Edna

d) If Homer ended up Bankrupt only 50% of the properties would be lost

Marge could have alternatively set up a testamentary discretionary trust to hold her share of the properties with the children as beneficiaries.


Seek legal advice (from a lawyer) before trying this at home.

 

@Terry_w - you must spend too much time watching the Simpsons

Time for another set of dysfunctional characters - Southpark

But seriously, this is such a common situation. Partner A passes away, partner B (JT) recieves the balance of the property. New partner of B & kids (steps or future) also have a claim.

It can become all the more complex (or not) by keeping the PPOR as JT to ensure the spouse has a roof over their head and adding a DT for the remaining assets which can be TIC and held in trust. This also limits the claim that may be made by the new partner C et al on the assets of A.

 

JT is often discussed in terms of good for old people and bad for young people. Its very simple for trusted long established marriages etc. But for younger couples it can expose major flaws and risks. There can also be mortgage issues with JT if the main income earner dies and the non-working spouse acquires the title. Life insurance could even be a strategy to assist to discharge a debt.

I'm often surprised that people who buy property cant explain what JT and TIC mean. Almost always they have signed a real estate agent contract prior to seeking legal advice. Then they get the conveyancer to settle it without a second thought or any legal advice

Sale contracts generally allow a choice of three different ownership methods when there is more than one owner on title

- Joint tenancy
- Tenants in Common in equal shares
- TIC in some other %

 

This is what happened to a friend of mine; her husband was an only child...father remarried to another lady who brought another son into the picture..

Many years later, father dies...guess where father's share of property ended up? Yep..the lady got the full share and will subsequently pass it to her own son...

So the house in question must have been held as Joint Tenants (ouch!) ...my friend and her hubby just "lost" a Million!

 

She could still make a family provision claim potentially. depending how long ago

 

Great post Terry! I have a few questions re TIC after reading your post and wonder what your thoughts are:

1. If Marge dies and there is still a big mortgage on the property, what will happen to Homer and Marge's joint mortgage by leaving 50% of the asset to parties outside the mortgage agreement (her children)? Homer now is responsible for 100% of the mortgage but he only has 50% of the asset.
2. Disregarding the mortgage question above, if Marge's will leaves her share of the asset to her children, does that mean her children needs to pay stamp duty? What if Marge actually didn't make a will so her share automatically goes to Hormer, does Hormer need to pay stamp duty to acquire that 50%?

Hope to hear from you.

 

If property is transferred any mortgage will need to be discharged. The mortgage will be securing a loan and depending on what the loan was used for and the will will determine where the money to pay it comes from.

There is no duty on the transfer of title resulting from death. If there is no will the property doesn't necessarily go to the spouse - intestacy laws will depend on the state law and the family situation.

 

Thanks for your reply Terry. If the loan is for the mortgaged investment property, and Marge's share of asset is left to the children who have no money to pay for the share of the loan, if Hormer is willing to continue paying mortgage for the full loan with his single income and rent income, will the bank ok with that? Or would the bank want to close off half of the loan?

What happens in a JT situation, as long as the surviving spouse can continue to meet the repayments, would the bank do anything?

 

No they would not allow that if the children become the beneficial owners of 50%.

If surviving spouse ends up owning whole property it would generally be ok

 

Thanks Terry. So it seems in a TIC situation where the property still has a large outstanding loan, if children don't have money to pay for their share and don't have the capacity to borrow, the property may have to be sold to close off the loan.

 

Yes in many cases it might