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

Discussion in 'Legal Issues' started by Terry_w, 18th Oct, 2019.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    25,779
    Location:
    Australia wide
    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.
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    17,076
    Location:
    Sydney or NSW or Australia
    @Terry_w - you must spend too much time watching the Simpsons ;)

    Time for another set of dysfunctional characters - Southpark :rolleyes:

    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.
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    11,964
    Location:
    Sydney
    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 %
     
  4. virgo

    virgo Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    356
    Location:
    Sydney
    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!
     
    Terry_w likes this.
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    25,779
    Location:
    Australia wide
    She could still make a family provision claim potentially. depending how long ago