There is no hard and fast rule governing Michigan joint accounts

By John Sharp

Without permission, joint account holders can dip into the account’s cash. In some cases after the parent dies, children refuse to share the money with their siblings. Unfortunately, the bank provides no recourse and the courts may not either.

Most recently, judges heard–and decided very differently–two separate joint account cases. The different results are puzzling. They show there is no hard and fast rule governing joint accounts. The best way is to avoid problems is through proper estate planning and hiring an attorney.

There are  pitfalls to joint ownership; creating joint bank account(s), joint securities account(s) or joint ownership of real property.  This article addresses five of the pitfalls.

1.     Joint Bank Accounts

Two very recent cases from Michigan’s Court of Appeals illustrate how joint bank accounts can lead straight to lengthy and costly litigation. In Paul v. Paul, No: 311609, December 17, 2013, Alan Paul sued his brother Craig Paul over the bank accounts of their deceased mother, Eleanor. Craig’s wife was employed at Chase Bank and had helped Eleanor do her banking by transferring all Eleanor’s money to a joint account that named Craig to take by survivorship on Eleanor’s death. This account was created shortly before Eleanor’s death. The Court said that there was no evidence Eleanor did NOT want Craig to get all her money, so the court would apply the presumption that the creator of a joint bank account wants the surviving account holder to get the money. Alan was left with empty pockets.

In Soltys v. Schmidlin, No: 311143, January 7, 2014, Leo and Dolores Soltys in 1992 put their daughter Kathleen’s name on their joint bank accounts. The Soltys had three children, Kathleen, Marlene and Dennis. But Kathleen’s name was the one on the accounts. Leo died in 2004 and Dolores died in 2007. Dennis and Marlene sued Kathleen saying that Mom had “always told them that all the children would be treated equally.” The court held that this rebutted the presumption of survivorship and that Kathleen had to share the accounts equally with her brother and sister.

Here’s the  kicker: the same three judges heard and decided both cases. In each case, it looks like what finally occurred was the opposite of what the parent actually wanted: In Paul, the joint account was created just before Mom’s death by Craig’s wife, who worked at Chase Bank and knew what she was doing. In Soltys, Mom and Dad created the joint account 15 years before and Mom never changed it in the four years she survived Dad. The different results are kind of puzzling They show there is no hard and fast rule governing joint accounts.

2.     Parent as Victim

I know of at least two cases where a parent put his or her adult child’s name on a joint bank account, only to have the child withdraw substantial funds during the parent’s lifetime. It doesn’t do any good for the parent to complain to the bank that the bank let the child withdraw the money when the parent put the child’s name on the joint account. Naming a person as a joint account holder gives that person the authority to take the money!

3.      Misworded Deeds

I have seen several cases where a parent added a child’s name to a deed, apparently intending to transfer ownership by survivorship to the child. But the parent who wanted to avoid a lawyer for estate planning also avoided a lawyer when filling out the deed. So, the parent didn’t use the magic words which trigger survivorship. A deed with two grantees but without any description of HOW they hold the property by law creates a tenancy in common, so the parent’s remaining interest in the property did NOT pass by survivorship and had to be probated anyway.

4.     The Predeceased Child Problem

If a parent properly creates a joint tenancy between the parent and the parent’s children over a bank account or real property, but one of the parent’s children predeceases, joint ownership cannot provide for the heirs of the predeceased child. They simply lose out on the parent’s death. Also, if there is no child who survives the parent on the deed, the joint ownership is ineffective and the property must be probated anyway.

5.     An Unnecessary Income Tax

Most people know that the federal estate tax now applies only to estates over $5.34 million, so almost everyone can safely ignore it. But people looking to avoid the cost of proper estate planning also forget about the income tax. It is true that property which passes at death gets a stepped up basis for income tax capital gains purposes. However, if a parent decides to give outright ownership of property to a child before the parent’s death by titling the property directly to the child–or worse yet–sells the property and gives the proceeds to the child before the parent dies, the tax results can be devastating. The stepped up basis can be lost as to all or some of the property, depending on how it is titled and when it is sold. At the time of the gift, the federal gift tax applies, but the same $5.34 million exemption applies to the federal gift tax. No harm, no foul, right? NO! Since the property was transferred during the parent’s lifetime, the parent-donor’s cost basis (what the parent paid for the property) becomes the child’s tax basis. When the child sells the property, the child gets a nasty income tax bill.

Let’s say the parent bought the property decades ago for $10,000 and the child sold it for $510,000. If it passed at death, there would be little or no gain because the fair market value at the parent’s death would become the child’s tax basis in the property. But if the parent transferred the property during the parent’s lifetime, the child’s tax basis is now $10,000, leaving a $500,000 taxable capital gain. Not only does the child pay up to 20% capital gains tax, but the child also has to pay a 3.8% Obamacare surcharge. So the child pays an unnecessary income tax on property the child otherwise would have received tax free by inheritance.

The moral of this story is that sometimes it pays to pay a lawyer to do proper estate planning! Don’t let yourself or any of your friends fall into any of the pitfalls described in this article.

John Sharp is a founding member of Strobl & Sharp, P.C. His expertise spans a number of practice areas from general business and corporate law to estate planning, banking and real estate planning.