Documenting intentions is essential to avoid ownership issues
by Jamie Golombek
Although summertime traditionally is a slower period (to wit, this combined July/August FORUM), it need not be unproductive. During these months, as Canadian families vacation together or just spend warm summer days lazing by the lake, the talk often turns to estate planning.
To this end, numerous articles have been written on how to transfer the vacation property to the next generation while paying minimal income tax or, in some provinces, avoiding the probate tax. One such strategy, discussed in my feature article last year, "How Not to Avoid Probate" (FORUM May 2006), involves putting the property into joint names.
While I've always argued against this idea for a number of reasons, the two recent decisions of the Supreme Court of Canada in Pecore v. Pecore (2007 SCC 17) and Madsen Estate v. Saylor (2007 SCC 18), whose judgments were released simultaneously on May 3, 2007, should serve as ample warning about the biggest danger of holding assets - whether the cottage or the investment account - in "joint ownership with rights of survivorship" or JTWROS.
What was at issue in both cases was the meaning of "joint ownership" of investment accounts and the true intentions of the original owners when the joint accounts were established.
Joint ownership is a common way to hold investment assets and is most often used to avoid provincial probate taxes. It's also often used for convenience purposes so that any joint owner can deal with the account during their lifetimes and the assets pass immediately upon death of one of the owners to the survivor, with minimal administrative delay.
But, when monies are put into JTWROS, what is really happening? Has a gift been made at the moment another account holder is added to the account? Or are the funds merely being held in a resulting trust for the benefit of the original owner, to be dealt with upon death as part of the original owner's estate? These questions (and more) were addressed in these two cases.
In the first case, Edwin Hughes, father of Paula Pecore, put nearly $1 million of mutual funds into joint ownership with his daughter Paula. Upon Mr. Hughes' death, the assets in the joint account were transferred into Paula's name. Two years later, Paula and her husband, Michael Pecore, separated and, in the course of the divorce, Michael tried to go after the assets in the joint account since he was a beneficiary under his ex-father in-law's will. His argument was that the transfer of the joint account into Paula's name was not a true gift since it was done "for probate purposes only". Both lower courts disagreed and found that Paula legitimately inherited the account through JTWROS.
The second, very similar case, involved Michael Madsen who named only one of his three children, Patricia Brooks, as the joint owner of his investment accounts. After Michael's death, Patricia's brother and sister sued and claimed that their late father only named Patricia on the account "for convenience purposes" and thus no true gift was made. As a result, the monies in the joint accounts should be distributed in accordance with the will, with both siblings receiving a portion of the funds. Both lower courts agreed.
The Supreme Court of Canada (SCC) saw no reason to reverse either of these lower courts' decisions. The court found that due to the presumption of resulting trust, the onus falls on the surviving joint account holder to prove that the transferor intended to make a gift of any remaining balance in the account.
Factors that should be considered to determine the transferor's intent include: wording in any financial document used to open the account, control and use of the funds while the transferor was alive, whether a power of attorney was granted, who paid the tax on the account and any other evidence the court finds necessary to establish intent.
So, what lessons can we take away from these two decisions? Perhaps the most important one will be that if clients still insist on making an account JTWROS, they should be sure to document their intent.
One way to do so is by signing a "Declaration of Intention" for joint assets. While anyone presumably could make their own such declaration, Ontario wills and estates lawyer Les Kotzer has prepared a "Joint Asset Planning Kit" that includes all the forms needed to declare your intentions regarding all of your joint assets.
The kit includes special language that reflects the SCC's decisions and even has a "special clause" that promises to protect the joint asset from your ex-son-in-law or ex-daughter-in-law in the case of a child's separation or divorce.
To find out more information about the kit or to order, visit Mr. Kotzer's website at www.familyfight.com.