Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss two crucial factors you need to understand when considering the use of joint ownership as an estate planning strategy.
Specifically, we will cover:
- The pitfalls of probate planning.
- The two distinct forms of joint ownership.
- How a well-considered estate plan can protect your true intent.
- An example of what not to do.
- And lastly, a few action items for you to consider.
Throughout my years as a Wealth Manager, I have come across this scenario numerous times, and chances are if you or your parents own property, these exact questions may come up.
Perhaps you're thinking about helping with your aging parents' finances and considering adding yourself to the title on their home or other property to make things "easier." Or maybe you're thinking about adding an adult child to that cabin property you want to ensure stays in the family. Well, I'm here to tell you that you may want to think again.
It seems like a simple enough "fix" to streamline your estate plan or that of your aging parent, and it may even help minimize the impact of probate fees.
What are probate fees, you ask? In Saskatchewan, when one passes, some assets may need to flow through the estate. The assets that do are subject to a probate fee of $7 per $1,000 of value passing through the estate. So, say at your last parent's passing, they had $1,000,000 in property and land that flowed through their estate. In Saskatchewan, this would trigger $7,000 in probate fees. Probate fees vary from province to province, so be sure to check your relevant jurisdiction.
This is often the starting point for many who think it may be best to avoid probate by adding themselves as joint owners to their land or property. However, there are two distinct forms of joint ownership you need to understand before considering this strategy. Why, you may ask? Because adding an adult child as a joint owner to property could have unintended tax and legal consequences that could significantly outweigh the perceived benefit of avoiding probate.
So, if you’re a Canadian living outside Québec and considering sharing ownership of an asset with a child or aging parent during your lifetime, be careful. You’ll need to specify which type of joint ownership you’re choosing and be very clear about when both legal and beneficial ownership will be received. If you’re not careful, unintended tax burdens, estate complications, and family conflicts can result.
Let's break these two forms down a bit further and then provide you with a real-life example.
1. Presumption of Resulting Trust
This is the default ruling. In 2007, the Supreme Court of Canada ruled that when a parent gratuitously adds an adult child as a joint tenant to an asset, the court presumes the child is holding the property in trust for the parent's estate. The child does not receive beneficial interest in the property when he or she was added, only a "legal" interest.
In this case:
- There is no change in beneficial ownership when the parent adds the adult child, so no capital gains or losses are realized.
- During the parent’s lifetime, the parent must report all future income and capital gains from the property.
- During the parent’s lifetime, the child will not have any rights to any part of the asset.
- When the parent dies first:
- The parent will realize all the accrued capital gains on his or her tax return in the year of death.
- The asset will be considered part of the deceased parent’s estate.
- The child should transfer the asset to the parent’s executor to be distributed in accordance with the parent’s will – the child will not necessarily be the only one to enjoy the asset.
- If the executor is required to apply for probate, and the application requires full disclosure of all estate assets, probate fees may be payable for the asset.
2. Rebutting the Presumption of Resulting Trust
This can be done with strong evidence of the parent’s intent to “gift” an interest to the child. Proving the property is a gift requires strong evidence, often requiring proper legal documentation of the intent of the transferor.
If evidence of the gift is produced, then:
- There is a change in beneficial ownership when the parent adds the adult child, potentially resulting in a partial disposition of the asset. If there is an unrealized capital gain accrued, part of this gain would have to be reported at the time the joint owner is added, potentially resulting in a tax liability for the parent.
- During the parent’s lifetime, the parent and child should report an equal share in future income and capital gains on the asset.
- During the parent’s lifetime, the child will be a part owner of the assets, meaning that the child’s interest could be exposed to claims made by the adult child’s creditors (including the adult child’s spouse in the event of a divorce).
- If the parent dies first:
- The parent will realize the accrued capital gains with respect to his or her remaining share in the asset on his or her tax return in the year of death.
- The asset will not be considered part of the deceased parent’s estate.
- The child will inherit by right of survivorship, free and clear of any claims made by other estate beneficiaries.
- Probate fees will not apply to the asset.
Real-Life Example
Let's discuss an example of how disruptive joint ownership can be if not planned for and discussed clearly with all family members.
Susan was a 72-year-old widow with three adult children. Two of her kids, Curtis and Grant, lived in other cities. Her daughter Cindy lived nearby and was actively helping to care for Susan. One of Susan’s best friends passed away. Susan heard that, before her friend passed away, her friend listed a son as a joint owner of her home so that the son could inherit the house immediately and without probate fees. Susan thought this was a great idea, so she put Cindy as a joint owner of her home.
Cindy was married with two children and did not live with her mother. Cindy owned a very successful business and struggled to balance all her priorities – children, career, marriage, etc. Cindy’s marriage started to have problems a few years later. Cindy and her husband finally decided to separate and get divorced. The relationship became so tense that her husband decided to include Susan’s home as part of Cindy’s assets and demand a share.
Soon after, Susan started to get ill. Curtis and Grant blamed Cindy for their mother’s illness, attributing it to the stress of her home being attacked by Cindy’s ex-husband. Susan got so ill that she had to be moved into a nursing home. To pay for the nursing home with the comforts Susan wanted, Cindy needed to sell Susan’s home. When Cindy’s ex-husband heard of the plan to sell the house, his lawyer put a caveat on the house to protect his claim. Now, if the house is sold, half of the proceeds from the sale cannot be released to Susan!
As a result, Susan and her children decided not to sell the house until Cindy’s divorce was settled. This forced Curtis and Grant to start paying for their mother’s nursing home, creating more tension between the siblings.
Problems worsened when Susan died. Susan’s will stated that all her assets would be divided and shared equally by her three children. Other than the house, which was worth $400,000, Susan had less than $100,000 in financial assets when she died.
When Susan died, Cindy automatically became the sole owner of the house because she was the joint owner. Her ex-husband now had an even bigger target to attack – even if he is ultimately unsuccessful. From the point of view of Curtis and Grant, they each received $30,000 after taxes from their mother’s estate, while their sister now has a $400,000 house and $30,000. Curtis and Grant are obviously very upset because they do not see this as being an equal division of assets as stated in their mother’s will.
In this case, Curtis and Grant could consider challenging the estate asset division, citing that the addition of joint ownership was The Presumption of Resulting Trust, and that there may not have been sufficient evidence to rebut it.
Reflect on Your Estate Planning
At the end of the day, you want to ensure you are asking yourself the right questions and reflecting on your will to ensure the estate will be settled in line with your wishes or the wishes of your parents. A properly structured estate plan with the help of your financial professional and legal counsel can help avoid these types of issues.
Here are some questions to help you reflect on your current estate planning documents:
- Which end result do you want to apply – a resulting trust, or true joint tenancy?
- If you hold an asset in joint ownership with an adult child, what end result do you want?
- Do you want that child to have to share the asset with the other beneficiaries in your will, like other children, relatives, friends, or favorite charities?
- Or do you want your child to inherit the asset free and clear upon your death, with no obligation to share with the other beneficiaries of your estate?
In the absence of a clearly worded contract or trust agreement between you, your aging parent, or adult child, the result may well be that your child and other estate beneficiaries will spend all their time and money fighting about your intentions, leaving very few assets to be enjoyed.
Consider going to a lawyer to write a contract and update your will so they clearly explain your intentions and expectations, and have your children agree to them. This contract will hopefully prevent possible fights after your death or that of your parents and ensure final wishes are addressed properly.
Action Items from Today's Episode
1. Dust off your will and give it a read. Are your wishes still being met? Should you discuss your intentions with your family so that everyone is on the same page?
2. Meet with your Certified Financial Planner to discuss how to discuss how the structure of your will and beneficiary designations will impact your estate tax, estate equalization, family dynamics and more. Often times these conversations can help uncover unintended tax consequences that could have a significant impact on the net value of the estate and to the equal distribution to your heirs.
Lastly, is to meet with your lawyer to properly construct your will and other estate planning documents. I strongly advise that you keep a copy of your will for your records, perhaps in a safety deposit box, and with your lawyer. Every 3 or so years, or when a major life event takes place, Review your will and ensure the intentions of your will have remained intact.
Ok that will do it for today’s episode.
For the links and resources discussed please check out the link in the show notes or visit retiringcanada.ca
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.