Avoid joint ownership with your adult children
A lot of “do it yourself” estate planning to avoid i) probate, and ii) probate tax is based on putting property (bank accounts, investments, houses) in “joint tenancy with a right of survivorship”.
Our advice: do not do this without great advice first.
The law has changed. The presumption now is that assets in joint tenancy between a parent and adult child are held in trust for the estate of the parent. This applies to real estate (houses, cottages, etc.) and to bank accounts. (This presumption does not apply to beneficiary designations of life insurance, RRIFs, RRSPs, and TFSAs.)
This presumption is rebuttable. It is still possible for the adult child to prove that the deceased intended to give the property exclusively to that adult child, but the onus of proving this gift rests on the adult child. Unless the adult child who is joint with the parent can provide clear and compelling evidence that the parent intended an outright gift to that child alone, the surviving child will be deemed to hold the property in trust for the estate of the deceased parent. If you intend to make such a gift via a joint tenancy, then you should sign a written “declaration of gift” that states your intentions clearly.
In summary, on the death of the parent, real estate and bank accounts jointly held with an adult child:
a) do not automatically pass to the child who is the joint owner;
b) probate will likely be required; for instance, the financial institution where the asset or account is held (especially investments) should (or at least may reasonably) refuse to release the funds to the surviving adult child (joint owner, with their deceased parent); and,
c) the joint asset needs to be disclosed to the estate trustee and residual beneficiaries of the estate.
Joint tenancy with an adult child is a recipe for disaster. It is not an easy or quick way to avoid probate or estate administration tax.
Joint with your spouse works!
Joint tenancy between spouses does make things simpler. Often it is possible to avoid probate entirely if the house and bank accounts pass automatically to the surviving spouse. similarly, beneficiaries designations of RRSPs, RRIFs, and TFSAs can often result in ‘tax deferred roll-overs’ that significant advantages over cashing the funds out on the death of the first spouse rather than the second.
Other potential problems
In addition to the potential conflict about the estate, there are several other potential problems arising from joint tenancy with an adult child:
Income tax problems
Joint tenancy between parent and child does not avoid any income taxes and can potentially cause more income tax to be payable than if joint tenancy were not used. In particular if an adult child who does not live in their parent’s home is made joint with the parent on the parent’s home, then the child cannot claim the principle residence exemption with respect to gains in value on their half of the asset and the parent can only shelter one half the gains from the date of transfer to joint tenancy.
An asset transferred into joint tenant with an adult child is exposed to the creditors of the adult child. Consider this scenario: parent transfers fully-paid mortgage-free house into joint tenancy with adult child. Adult child later is sued by their former partner (spouse, or business partner) and order to pay a large debt. The former partner can now pursue their claim against the house, going so far as to force the ‘partition and sale’ of the house to satisfy the debt owed by the adult child to the former partner.
RRSPs, RRIFs and TFSAs
This presumption that joint assets actually belong to the estate does not affect beneficiary designations for RRSPs, RRIFs, or TFSAs, which continue to pass directly to the named beneficiary outside the estate.
However, for other reasons, beneficiary designations of this type can cause total chaos and hardship so extreme care is required before designating one adult child the beneficiary of these investment plans. In particular, on the death of the parent, there will be income taxes payable arising from the end of an RRSP/RRIF. These may be massive, as the entire RRIF/RRSP must be included in the income of the parent in their year of death. A rough rule of thumb is that the income taxes will be equal to one half (50%) of the value of the RRSP/RRIF.
But here is where the unfairness arises: income taxes must be paid by the estate from estate assets. In other words, it is quite possible that the the beneficiary of the RRSP/RRIF will receive 100% of the value of the investment funds, while the estate is left with a debt equal to approximately 50% of that amount in taxes. Obviously this depletes the estate available for the residual beneficiaries. (No taxes arise from the termination of a TFSA).
Again, our advice is to be very careful with beneficiary designations, and unless you have received careful professional advice do not name just one of your adult child as the sole beneficiary of your RRSP, RRIF or TFSA.
Our advice to financial institutions:
Do not automatically release ‘jointly held accounts’ to adult children of deceased parents.
If you do, you are exposing yourself to substantial potential liability to the residual beneficiaries of the estate of the deceased.
Before releasing property that was held jointly by an elderly parent and adult child you should require either:
a) probate of the estate including the jointly held property; or
b) a signed written release from all residual beneficiaries of the estate.
If you are affected by a joint tenancy claim by an adult child of the deceased
If an adult child claims joint ownership of assets with their deceased parent, the estate will be reduced. Sometimes the reduction is dramatic (especially with houses and large savings accounts).
The key for all parties is documentation (letters, emails, bank documents, etc.) –
- did the parent document an intention to gift the asset?
- what is the asset, where is it located, and how much is it worth?
- when was the joint tenancy established?
- did the deceased receive legal advice at the time?
- did the deceased consider the joint ownership when making their will?
- has the adult child joint owner refused to treat the asset as an estate asset?
The more documentation, the quicker and easier it is for us (and a Court) to address the issue.
These disputes are usually best handled by commencing an “Application for Directions” asking the Court for a ruling on whether the jointly owned asset is held in trust by the adult child for the benefit of the beneficiaries of the estate of the deceased parent. Learn more about Applications here.
We have considerable experience assisting with these circumstances by commencing court proceedings to force resolution as quickly as possible, including conducting a number of these cases ‘on success’ (contingency).
Please contact us for a consultation on your circumstances.