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Jointly owned Property and Bankruptcy

Question: What happens when one owner of a property becomes bankrupt?

Answer: The other non-bankrupt owners end up owning the property with the Trustee in Bankruptcy.

Example: Homer and Marge own 123 Smith Street which is their main residence.

Homer becomes bankrupt because his Mr Plough snow removal business failed as summer came. Upon bankruptcy the Trustee in Bankruptcy steps in Homer’s shoes and now becomes the legal owner of all of Homer’s assets. Since Homer only owns half the house and Marg owns the other half, she is not directly affected – Marge will own her 50% with the Trustee.

If the property was held as Joint Tenants in situations like the above, the joint tenancy would be immediately severed and the owners will become Tenants in Common in equal shares. The bankrupt owners interest would then pass to the Trustee in Bankruptcy.

What would happen next will depend on the amount of equity. There are 3 possibilities

a)     Nothing just yet
b)    Marge will be asked to buy out Homer’s share at full market value, or
c)     The property will be sold if Marge could not buy out Homer

The Trustee’s job is to maximise the return for creditors so they would not want to wait. But if the value of the property is the same of less than the loan then it may not be worthwhile selling as there would be nothing to come out for the creditors. Waiting 2 years or so may see some growth in the property and some equity may build up.

Note that the Trustee in Bankruptcy takes the property subject to any equitable interest – such as a constructive trust or a resulting trust. For example if Marge had paid 100% of the purchase price originally she might be able to argue that Homer held his 50% as trustee for her.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

The Need to Consider Assets Owned as a Joint Tenant in your Will

When two or more people own one asset, such as a property, as Joint Tenants if one dies the asset passes to the survivor automatically bypassing the will. Many people therefore don’t consider the issues of passing the asset in their will because it doesn’t – but this is only the case if you die first.

What if the property passes to you, and then you die shortly after without updating your will?

Example
Dave owns his house with his wife Betty, as Joint Tenants.
Dave dies. Betty inherits automatically. But Betty dies 6 months later without updating her will. Dave hadn’t considered his house in his will – and it would have had no effect if he did. Betty didn’t consider it either, but now the whole house will pass via her will, or the intestacy laws if she has no will.

Solution – assume you will solely own joint tenant assets when making a will.
r more people own one asset, such as a property, as Joint Tenants if one dies the asset passes to the survivor automatically bypassing the will. Many people therefore don’t consider the issues of passing the asset in their will because it doesn’t – but this is only the case if you die first.

What if the property passes to you, and then you die shortly after without updating your will?

Example
Dave owns his house with his wife Betty, as Joint Tenants.
Dave dies. Betty inherits automatically. But Betty dies 6 months later without updating her will. Dave hadn’t considered his house in his will – and it would have had no effect if he did. Betty didn’t consider it either, but now the whole house will pass via her will, or the intestacy laws if she has no will.

The Solution? – assume you will solely own joint tenant assets when making a will; How many people will do so? Without proper legal advice, unfortunate very few.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Double Dipping with the Pension

Have you ever heard of double dipping with the pension? This is where you spend your assets so that you can get the pension.

Here is a brief example:

A pension age couple who have $1mil in super and own their own home may not be able to get the pension because the super is over the asset threshold of $830,000.

The $1mil may be earning them $30,000 in income per year.

Another couple may have $1mil in super, but they spend $540,000 on a bloody great holiday.

Their assets are thereby reduced and they now qualify for a part pension. For the couple the pension works out to be $982 per fortnight or $25,532 per year. But they still have $500,000 cash which they could invest and get $15,000 per year at 3% return. This would total $40,532 per year.

So by blowing $540,000 on expenses a couple could increase their income by more than $10k pa.

Believe it or not many have this attitude – they think they deserve the pension and they will do almost anything to get the maximum allowable. Including spending say $540,000 to qualify for $10,000 per year extra income.

Modelled on an article from The Tax Institute https://www.taxinstitute.com.au/news/3-november-2017

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Don’t rely on a lender’s valuation for CGT

When a property first becomes income producing the cost base is reset to the value at the date it becomes income producing.

Many people want to save a few hundred dollars by not ordering a valuation, but rather rely on a bank’s valuation. This could be potentially costing them  thousands of dollars.

Example

Ned moves out of his property and gets his broker to order a bank valuation which comes in at $475,000. Ned thinks this is a bit low and asks for another valuation, but the bank refuses and so he doesn’t really think about it any further.

Maude, Ned’s wife, orders a private valuation for tax purposes which comes in at $500,000.  When the property is later sold for $600,000 there will be a difference in the cost base:

  • 1st Valuation will make the gain to be $125,000
  • 2nd valuation will make the gain to be $100,000Applying the 50% CGT discount these become: $62,500, or $50,000
    Added on to their marginal tax rates of 39%: $24,375 in CGT or $19,500
    Taking the time to order a second valuation has resulted in a tax saving of $4,875.

Not bad tax saving when the advice only cost $660!

 

This article was written by Terryw from:

www.structuringlawyers.com.au

  • July 2, 2018
  • CGT
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