Cases Where Avoiding Probate Caused Costly Problems
By Attorney John L. Roberts, Longmeadow, Massachusetts
Avoiding Probate is a good idea, but it has taken some people to extremes.
People can become so obsessed with avoiding probate that they lose sight of other important legal concepts such as income taxes, ownership of real estate, and asset protection. At this extreme, people make bad decisions that cause income tax liabilities and real estate title problems that cost thousands of dollars to correct.
Disadvantage of Joint Ownership #1: Joint Ownership exposes the property to the liens and creditors of all the Joint Owners. Example: Mary Smith heard from her friends that putting her house and bank accounts into Joint Ownership would avoid Probate upon her death. She decided to transfer ownership of those assets to herself and her two adult children, Sam and Diane as Joint Tenants with Right of Survivorship. Unfortunately, Sam had financial problems and he filed Bankruptcy. Mary's house and bank accounts became an item in Sam's Bankruptcy case.
Mary also transferred her stock brokerage account and her CD's into joint ownership with her two adult children. Diane became involved in a serious car accident, and the victim's lawyer obtained a lien against Diane's assets, including the jointly owned accounts.
Disadvantage of Joint Ownership #2: Putting a house or any other asset into Joint Ownership relinquishes control, requiring you to share management of the asset with the other Joint Owners.
Example: After Mary Smith listed her adult children as Joint Owners of her accounts, adult daughter Diane got hooked on an expensive habit (such as buying lottery tickets) and she withdrew money from Mary's bank accounts before Mary realized what was happening. Eventually, Daughter Diane went into Bankruptcy, and Mary's house was an asset in the Bankruptcy estate.
Example: Son Sam got divorced, and his interest in his mother's house became another issue in the divorce proceedings, because Sam was a joint owner of the house.
Disadvantage of Joint Ownership #3: Transferring a principal residence to Joint Ownership may disqualify you from part or all of the capital gains tax exclusion on the sale of a personal residence, and cause unnecessary income tax liability if the residence is sold in the future.
Example: Years later, after Mary's children had straightened out their legal problems, Mary Smith decided to move somewhere else, and sell her house. The value of her house had increased greatly since she bought it. She was able to get Sam and Diane to sign a deed to the person who wanted to buy the house, but at the closing Mary had to answer questions on a form about how long she had owned the house and who lived there. Because there were other owners (her children) who didn't live in the house, the sale was reported to the IRS, and there was an income tax on some of the profits from the house sale.
Income tax problems are among the worst nightmares for surviving family members, when a person takes upon himself or herself themselves the challenges of Avoiding Probate, but neglects to consider all the issues. A prime example is found in the decision to transfer property into joint ownership or life estate arrangement, without considering the capital gains tax on appreciated property. Capital Gains tax is a form of Income Tax on the profits a person makes when he or she sells a house, stocks, bonds, or other types of property. Your family could end up paying an unnecessary tax on the sale of valuable property if you transfer that property into joint ownership. More Info: The Principal Residence Exclusion.
Disadvantage of Joint Ownership #4: Failing to Properly Title the Joint Ownership. There are forms of Joint Ownership that do NOT avoid probate. If people own property jointly as Tenants in Common, the ownership interest of each person does not terminate at death, but passes to the decedent's heirs. There is no right of survivorship, so Probate proceedings would be required to transfer the decedent's interest if it is held as Tenants in Common.
Disadvantage of Life Estates #1: Transferring ownership of property can expose the property to the liens 
and creditors of all the Remainder Persons. Example: Mom and Dad decided to transfer ownership of their home to their daughter and son-in-law, while retaining a Life Estate for themselves. Unfortunately, Son-in-law had financial problems and he filed Bankruptcy. Mom & Dad's house became an asset in Son-in-Law's Bankruptcy case.
Disadvantage of Life Estates #2: Transferring an ownership interest may disqualify you from part or all of the capital gains tax exclusion on the sale of a personal residence, and cause unnecessary income tax liability if the residence is sold during your lifetime.
Conclusion: Always consult a professional who will protect your best interests, before you designate beneficiaries, change the ownership of property, or transfer ownership interests to children, relatives or other people. Joint Ownership can cause serious tax consequences and it can expose the entire property to creditors of any of the joint owners. There are other consequences if a person transfers ownership to someone who later goes through bankruptcy or a divorce.
