If you're thinking of putting assets into joint ownership with your children, read this first
“Be afraid. Be very afraid.”
That’s the warning I give, repeatedly, whenever I’m approached by accountants, financial advisors, clients, friends, relatives and even total strangers at cocktail parties, who ask me what I think about putting their home or non-registered investment account into “joint” names with their adult child.
While there may be a variety of reasons Canadians seek to put an asset into joint names with right of survivorship, for most, the primary motivation is the potential savings of probate fees (or tax) upon death.
What is probate?
When you die, your will gives legal authority to your executor to deal with your estate. Although your executor is legally entitled to do so, when the time comes to sell or transfer certain assets registered in your name, such as investments and real estate, probate is usually required. Probate is the process of obtaining court certification of your will. It serves as proof to financial institutions, financial advisors and the land registry office that your will has been certified by the court and that your executor is authorized to represent your estate.
So, why do so many Canadians try to avoid probating a will if it provides the executor with legal protection? Often, it’s because of the perceived cost. Probate fees or taxes apply in nearly every province and territory, although whether they are a true financial burden or merely a minor nuisance, depends on both the value of your estate and the rate of probate fees levied by your particular province or territory. For example, there are no probate fees in Quebec (for notarial wills), and Alberta levies a flat probate fee, which caps out at a maximum of $525. Compare this to Nova Scotia, which charges 1.695 per cent for estate assets greater than $100,000, or Ontario (1.5 per cent) or B.C. (1.4 per cent), which levy relatively high rates for estates over $50,000.
Since probate fees are based on the fair market value of assets that pass under the will, by putting a home or brokerage account into joint names, the thinking is that it will pass directly, by operation of law, to the joint survivor, bypassing the estate altogether and thus not be included in the value of the estate for the calculation of probate.
In my view, probate fees are a small price to pay compared to the risks and potential costs of joint ownership. First, there’s the tax risk as, technically, adding a joint beneficial owner results in an immediate deemed disposition of your share of the asset. This could trigger a taxable gain on your share of the asset being put into joint names.
Secondly, there is the potential for future familial disputes among siblings and other family members who may not all have been added to the account in question. To wit: “Ummm….Sorry, bro. Mom actually wanted me, the joint owner, to inherit this entire account. If she wanted you to inherit the account too, she would have added your name as well.”
And, if that’s not reason enough to avoid putting an account into joint names, the third risk is that the joint asset could now be subject to the claims of your children’s creditors. That’s exactly what happened in a recent B.C. Supreme Court decision.
The case involved a Burnaby, B.C. homeowner we’ll call Mom, who, in 2015, added her son as a joint tenant on the title of her home. She did so based on estate planning advice she received at the time, including to avoid the payment of B.C. probate fees on her death. Her son did not contribute in any way to the purchase or upkeep of the house and she did not advise her son that he had been added as a joint owner.
Fast forward to August 2017, when her son and his software company were sued to the tune of $800,000 and a judgment was ordered against the son. In October 2017, the creditor registered a certificate of judgment upon the son’s half interest in Mom’s home.
Mom tried to argue that she did not intend to gift her property to her son, and that her son maintains no beneficial interest in the property and therefore, the creditor cannot register its judgment against the home.
In Mom’s sworn affidavit, she asserts that “she had no intention in 2015 to transfer any part of her interest in the (home) to (her son), and that the registration of joint tenancy was made solely to facilitate the transfer of the property to her grandchildren on her death.”
The judge was skeptical and found this statement contrary to Mom’s statement of intention found in her will, prepared in 2015, and which stated, “I declare that I contemplate naming my son … as joint owners of some of my assets … it being my intention that upon my death, such to belong to the named beneficiary, at law and in equity.”
The judge therefore concluded that it was, indeed, Mom’s intention to gift an interest in her home in favour of her son when the joint tenancy was registered in 2015, as described in her will. As the judge concluded, “(Mom) took a risk in registering her son as a joint tenant on her property. Whether she was properly advised of that risk is not before me. However, once she made the decision to register an interest in (her home) in (her son’s) name, third party creditors of (her son) became entitled to register judgments against (his) interest in the (home).”
Fortunately, the creditor advised the court that it will not execute against the property while Mom is living in the home as “(The creditor) is not intending to dispossess (Mom) of her home while she is living in it.”
Corina Weigl, a lawyer at Fasken in Toronto who recently blogged about the case, said that she sees “this (joint ownership) strategy used fairly regularly without any consideration of the (probate) taxes to be saved and the timing of those savings versus the costs incurred to fully implement the plan and the risks assumed. This is one planning point where it is critical to … ‘not let the tax dog wag the planning tail’.”
For clients for whom probate planning is warranted, Weigl advises on the use of other strategies such as alter-ego trusts, nominees for real estate and multiple wills.