In my practice, I frequently encounter elderly parents who have added their adult child to their bank or investment accounts, or transferred real property into joint tenancy with one or more adult children.
This is often done for convenience so that an adult child can help their aging parent pay bills and generally manage their finances.
Families also use joint ownership in an attempt to reduce or avoid probate fees. Probate fees, officially called Estate Administration Tax, is paid on the value of the assets owned by the deceased at death and are roughly equal to 1.5% of the total value of the deceased’s estate. Assets that pass outside of the estate through right of survivorship or beneficiary designations are not subject to probate fees. For this reason, parents often use joint ownership thinking they are saving their estate money.
However, there are a number of risks with this approach, largely based on a misunderstanding of the law:
There is a common misconception that each joint account holder owns and has access to one half of the funds in the joint account. In fact, both account holders have equal rights to access joint accounts. Either party can drain the account of its funds, regardless of who deposited the funds in the first place. In the case of jointly owned real estate, you will need the consent of your adult child if you want to sell or mortgage the property. Thus, there is a loss of control when you transfer assets into joint ownership.
Income taxes may be unintentionally triggered on the transfer of capital assets from a parent to a parent and an adult child. The transfer results in an immediate disposition for income tax purposes and triggers tax on any unrealized capital gains.
Your child may become liable for capital gains tax. This is a significant drawback, especially where parents transfer real property into joint tenancy with an adult child who already owns a principal residence of his or her own. Owning a second property will expose the child to capital gains tax on the second property when it is sold as only one property can benefit from the principal residence exemption.
Joint ownership exposes your assets to your child’s personal and business creditors and his or her spouse on matrimonial breakdown.
The joint owner may not be the only intended beneficiary on death. Conflict among your children may arise where only one child is added as a joint owner but your will states that your estate is to be divided equally among your children. What happens to the jointly held asset? There is a ton of estate litigation over this issue which can leave families torn apart and footing a large legal bill.
You may not have accomplished what you think you have. Merely recording title as joint ownership does not necessarily make it so. In the case of married spouses holding assets jointly, the assets will pass to the surviving spouse on the death of the first spouse by right of survivorship. This is also true where a parent holds assets jointly with a minor child. However, this is not always the case with adult children. The Supreme Court of Canada has made it clear that where a parent owns assets jointly with an adult child, the child is presumed to hold his or her share in trust for the parent’s estate. The presumption can be rebutted where the adult child can prove the parent intended the child to inherit the asset on death rather than it being distributed in accordance with the parent’s will. The court will look at a number of factors to determine the parent’s intent, such as whether the parent signed a deed of gift/declaration of trust at the time of the transfer, whether the parent continued to control and use the funds after the transfer, whether the parent continued to pay income tax on the income earned. If it turns out that the asset was being held by the adult child on resulting trust for the parent’s estate, then probate fees will be payable on the value of the jointly held asset.
As can be seen, deciding whether an asset should be held jointly with an adult child involves considering a host of tax and legal factors. If your desire is to save probate fees, seek professional advice from a lawyer and/or accountant, as there are ways to successfully reduce or avoid probate fees without exposing your estate and your beneficiaries to unintended costs and consequences.