In this month’s issue of API, we hear from Bryan Mitchell, accredited specialist in wills and estates at Mitchells Solicitors about asset protection.
By Dinah Lewis Boucher
Our story on estate planning obviously got us thinking about our loved ones and our assets, including the biggie of our property portfolios. After all that hard work during a lifetime building up your asset base, will those you love actually receive what you’ve left for them when that final curtain call comes?
One key issue many may only realise when it comes time to organise their estate is the importance of understanding how you should own your assets. Mitchell says this is apparent particularly when more than one person has ownership of an asset. People can own assets together in a number of ways. One way is as joint tenants with one or more owners and another way is as tenants in common.
Joint tenant and tenants in common
“When someone who owns an asset as a tenant-in-common dies, his or her interest in the asset passes to the estate, where their will should deal with to whom the asset is passed,” Mitchell says.
But the most common way for a couple to own assets, and especially property, is as joint tenants.
“This means, when one party passes away, their interest in the property automatically flows to the other party as a matter of course, rather than forming part of their estate,” he says.
“The implications of this are obvious in a marriage-style relationship, but what if three people own a property as joint tenants and one party dies? Assuming each party had a one-third interest, the two surviving owners will split the one-third share of the deceased party and gain further interest in the asset. Bank accounts held by two or more parties (other than partnership accounts) are deemed to be owned as joint tenants. Therefore, upon the death of one party, the funds in those accounts pass automatically to the surviving party/ies.”
Mitchell outlines the advantages of owning assets as joint tenants
- Hold property in joint tenancy if the intention is for the surviving party to take the asset, then the surviving party can take the asset outside of the estate without fear of litigation or a family provision claim (note: this strategy won’t work in New South Wales).
- The surviving party will continue to have access to cash in the bank account rather than having it frozen. Any account held solely in the name of the deceased will be frozen until a grant of probate is issued.
The disadvantages of owning assets as joint tenants
- Any estrangement of the joint owners will create difficulty, particularly if the intention of the owners has changed over time. For example, a married couple might buy a home early in their marriage as joint tenants. If they separate 10 years later but don’t formally end their relationship and divide the property, if either party dies, the other will receive the entire asset, whether this was the intention of the deceased party or not. This outcome can be overcome by changing the type of ownership to tenants in common, so that the deceased person’s interest in the property is passed to the estate where it can be dealt with under the will, Mitchell says.
- In the case of blended relationships, where there are children from previous relationships, owning assets jointly with a new spouse can lead to a whole slew of complications, including the possibility that children from a previous relationship receive nothing upon the death of their parent.
So, what works best for you?
In uncomplicated cases and for modest estates, Mitchell says holding assets jointly may be best (subject always to receiving specific advice on the matter). But for more complicated cases, such as blended relationships, consider the ownership of the assets carefully. Of course detailed professional advice should be sought in these circumstances.
“It may be worthwhile to consider strategies that include tax effectiveness in using a vehicle such as a testamentary trust under a will or even a discretionary trust formed now,” Mitchell says.
As always, when considering your estate planning needs, it’s best to consult a specialist who can address these and other issues for you.
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Australian Property Investor is Australia’s first property investment media content provider having been providing industry commentary, advice and direction for over 18 years.API provides independent & impartial property commentary on all aspects of the property investment market. It delivers an in-depth look at investment success measures, tools, techniques and outcomes and looks to provide a complete national property investment coverage.