Joint Ownership to Avoid Probate and Traps for the Unwary (Part 1)
Joint ownership is one type property ownership option that generally avoids Michigan probate. Property is classified as jointly owned when two or more people own the same property. There are many different types of jointly owned property under Michigan law and each type provides for different rights in the same property. For probate purposes in Michigan, jointly owned property is generally considered a nonprobate asset that passes upon one owner's death to the other joint owner (or owners) by a nonprobate transfer. While there are instances where nonprobate assets may be included in the probate estate, and subject to probate, properly executed joint ownership property should generally result in nonprobate transfers of the property. Ownership will transfer outside of probate. One exception to this general rule is where the nonprobate transfer fails. This blog post will highlight the various types of jointly owned property, the differences between them, and when the related nonprobate transfers may fail. Clients should take these issues into account when reviewing their estate plan and related documents.
Disputes may arise when assets that are held in a joint account are also specifically included in the will. For example, a parent may devise a bank account to one child, but jointly own the account with another child who is taking care of the parent. Upon the parent's death, the joint owner claims ownership and the other child who is expecting to take the funds from the account through probate is disappointed. In such cases, the child not on the account may have a claim if there is clear evidence that the intent was for the joint owner child to have access solely for the convenience to take care of the parent. There is a presumption in favor of the joint owner, however, so care should be taken if bank accounts with joint owners have substantial balances.
Other issues may arise related to the ownership of real property, which may be the largest asset in some estates. Under Michigan law, the methods of ownership of real property include a "fee simple", life estate, lady bird deed, tenancy in common, joint tenancy with right of survivorship, and tenancies by the entireties.
An owner of a fee simple estate owns all the rights to the property including current and future use. A fee simple may also grant others a life estate in the property or add a joint owner if none exist. Other rights may be transferred including a remainder interest of a life estate or leases. The fee simple owner can transfer the property during life or upon death through a will. If no will, the property would pass through intestacy (probate without a will).
An owner of a life estate in property has the full use and enjoyment of the property for that person's life, but cannot transfer the property upon death because the life estate owner's interest terminates upon death. A life estate may be held jointly with others to the extent of that person's life, but a life estate owner may not transfer the fee simple or rights other than a life estate unless that power is granted to the life estate owner from the fee simple owner. Such a power may exist through a power of appointment in the fee simple owner's will or other testamentary document.
A lady bird deed is still a popular estate planning tool and Michigan law respects this form of ownership. A ladybird deed is similar to a life estate, but the ownership of the life estate is slightly different. The owner of the property conveys a life estate to him or herself, and then gives the ownership right to the entire property (a fee simple) to another person, called the remainder beneficiary. In a lady bird deed, however, the grantor of the property who owns the life estate retains the right to transfer the entire ownership of the property or sell the property outright during the grantor's life. If the life estate owner does not sell the property prior to death, the remainder beneficiary gets the property. If the life estate owner sells the property during life, the remainder beneficiary does not have any rights in the property. Effectively the rights cease to exist upon the sale. Care must be taken regarding the format and language in the real property deed to convey the intended ownership rights.
Another type of ownership interest that may create problems is joint ownership of property by a tenancy in common. A tenancy in common is a joint ownership interest where the joint owners have equal rights in the property but there is no survivorship rights. In other words, when one owner dies, that person's interest passes through probate either under the terms of a will or through intestacy if there is no will. The other owners do not automatically absorb the deceased tenant in common's ownership interest in the property. Michigan law presumes that two non-married owners hold property as tenant's in common unless the language specifies survivorship rights. The language of a deed should be carefully reviewed to determine or confirm the rights in property conveyed if a parent conveys interest in real property to children as part of an estate plan. This commonly occurs when parents plan to pass a vacation home or place up north (i.e., a cottage) to their children. Tenants in common may also sell their interests to third parties, assuming a third party would want to join ownership with unrelated persons, and can create headaches for all involved due to the ability to transfer the property. This loss of control may make ownership by a tenancy in common problematic.