The simple answer is no, there’s always some risk when putting property into someone else’s name. The severity of that risk is greatly dependent on the specific situation.
People put property into other people’s names for a variety of reasons and in several different ways. For the purposes of this post I’ll only be talking about when people have bought or transferred real property in the name of a person who isn’t really intended to be the real owner.
Some of the more common situations are:
- Putting a family member on the title to assist with a finance application
- Having the land be in one family member’s name only, when in fact it’s intended to be owned by more than one
- Putting the land in the name of someone else entirely
- Formally putting the property in a trust
There are a variety of ways that these types of arrangements can fall apart or end up more complicated and costly than anticipated. Often when that happens the parties’ plans backfire spectacularly. So let’s have a look at a few ways that they can cause trouble.
Disputes about who owns the land
Does anyone expect to have a dispute of this kind? Probably not, but they definitely do happen.
The starting point is that whoever is registered on the title is the actual owner. If that is not the case, then it’s up to the real owner to prove it, which can be very difficult.
If there is a dispute then the court would need to look at the intention of the parties when the land was acquired as to who would own it and how. That may not be clear from both a factual perspective and a legal perspective. In some circumstances where a family member pays for the property, the law will presume that a gift from that family member was intended.
The parties might also have changed their plans along the way or not lived up to their original plans, creating further uncertainty and questions for a court to determine if need be. This kind of scenario is what more frequently leads to a dispute.
People often ignore how holding land for someone else can significantly complicate their own financial affairs.
It can cause difficulties when looking to obtain finance for their own purposes. There are likely to be additional accounting and other costs and various hoops that you’ll have to jump through — over an extended and potentially indefinite period of time. Depending on the circumstances, it may mean additional tax liabilities.
Undoing these arrangements can also involve additional costs and expenses (including potentially stamp duty and capital gains tax).
When things don’t go to plan
What do you do if the person who was meant to be paying (or contributing) to the mortgage or rates doesn’t?
What if the registered owner goes bankrupt?
What do you do if one party wants to sell but the other doesn’t?
Who is responsible if there’s a dispute with a neighbour, tenant or someone else?
What happens if the property has to be sold at a loss? Who gets the equity? Who pays the bank?
What happens if one of the parties dies?
These types of questions do cause many disputes. Even when the final answer is the one you want, getting to that result can be extremely expensive.
I’ll get right to the point: many of these arrangements are associated with an element of fraud or dishonesty at some stage. It’s not ok to lie on a finance application. It’s not ok to try to hide property from the Family Court or Centrelink. It’s not ok to move property around to try to defeat creditors. It’s not ok to enter into schemes to obtain tax benefits. It’s not ok to assist others with any of these.
Leaving aside the issue of potential criminality, some types of improper transaction can be set aside and there may be other penalties that could defeat the purpose of the transaction. And if you do end up in a dispute about who owns or is responsible for the land, being involved in a dodgy transaction isn’t going to make you seem very honest to the court.
So care needs to be taken to make sure that things are done the right way and for a proper purpose.
If a person holds property for another person (or persons) then they are said to hold the property on trust for those people (beneficiaries) as trustee. So often these arrangements involve a form of trust, whether intended or not.
Trustees have rights and duties. Trustees have to look after the interests of the beneficiaries and are (normally) entitled to reimbursement for their proper expenses.
Setting up a formal trust for the land can be safer in several ways and including because the question of ownership is more certain, but it still involves giving up some control over the land when compared to owning the land in one’s own name.
For tax or asset protection reasons property is often purchased in a discretionary family trust. In this type of trust, the trustee has a discretion as to who receives the benefit of the land. But it also means that no one owns any defined share in the land and so it will also often mean that whoever put the money in to buy the land doesn’t actually have any right to the land or those monies. That may come as a surprise to some, and may require consideration when it comes to wills and estate planning.
What to do then?
Accounting and legal advice at an early stage can help avoid some of the most common pitfalls and is highly recommended. The above is only a short general list of some of the possible problems and is no substitute for real advice.
If it is a trust arrangement where someone else owns the land (in whole or in part) for another, then that should be documented. A co-ownership agreement or loan agreement might be another option depending on the circumstances.
Where possible, it is normally necessary or at least very helpful to register a caveat, as this can provide a degree of protection against the registered owner transferring or mortgaging the land without the consent of the other party.