WILL SEVERING JOINT TENACY PROVIDE SOME ASSET PROTECTION TO MY CLIENT?
01 09 2006
How many accountants have considered the severing of joint tenancy of a property as a means of asset protection for their clients, particularly where there may be an “at risk” party (e.g. director of a company or in a partnership)? It is of significantly greater relevance when the spouse may have health issues. The matter of Peldan v Anderson [2006] HCA 48 (4 October 2006) eventually went to the High Court of Australia with the decision being handed down on 4 October 2006.
What was in dispute was the remaining one-half of the proceeds of sale of a property (the other half having already been paid to the bankruptcy Trustee). Mr and Mrs Pinna had purchased the property in 1995 and they were registered proprietors as joint tenants. Under joint tenancy, on the death of one joint tenant their full interest in the property passes to the other joint tenant. In 2003 Mr Pinna unilaterally severed the joint tenancy, the result of such severing being that each party was now a tenant in common with a 50% interest each in the property rather than a full interest as under joint tenancy.
Mrs Pinna died on 12 January 2004 and not for the severing of the joint tenancy her interest at that time would have passed to her husband (i.e. he would have had a 100% interest in the property). Mr Pinna became bankrupt on 21 April 2004 and the property was sold for $600,000 after his bankruptcy.
The bankruptcy trustee argued that the unilateral severance of the joint tenancy was a transaction (resulting in a transfer of property) by Mr Pinna which was void against the bankruptcy trustee by operation of Section 121 of the Bankruptcy Act (i.e. Transactions to Defeat Creditors). The Court noted that at the time of the severing in 2003, had Mr Pinna been declared bankrupt at that time, the bankruptcy of Mr Pinna would have worked as a severance of joint tenancy in any case and the bankruptcy trustee would have only been entitled to a 50% interest. Accordingly, the Court held that the bankruptcy trustee was not entitled to the additional 50% interest in the sale proceeds. This is an important decision given that if the severance had not occurred prior to her death the bankruptcy trustee would have been entitled to 100% of the property. Most husbands and wives hold their matrimonial home on a joint tenancy arrangement which has the potential to take at least 50% of that property out of the hands of their children etc and into the hands of a bankruptcy trustee on the death of one spouse prior to the bankruptcy of the “at risk” party.