When you put joint names on an account, what does that really mean? That was
the question the Supreme Court of Canada struggled with this past week as it
heard two seminal cases involving joint accounts and the original owners' "true
intentions" when making the accounts joint.
Joint tenancy with rights of survivorship (JTWROS) is a common way to hold
investment assets and is most often used to avoid provincial probate taxes. The
assets transfer by right of survivorship, thereby bypassing the estate and
minimizing probate taxes.
Another reason for holding assets in such an account is "for convenience
purposes," so that either joint owner can deal with the account and the assets
will pass immediately upon death without any delay.
Unfortunately, the question of true intent often arises with joint accounts
after the death of the transferor -- the person putting the account into joint
names with someone else. In other words, did he or she intend to make a gift of
the assets either at the time the joint owner was added to the account or upon
the transferor's death? Or, alternatively, was an account made joint with a son
or daughter only to save on probate fees or for convenience purposes?
The two cases heard in the highest court this week were both appeals from the
In the first case, Edwin Hughes, father of Paula Pecore, put nearly
$1-million of mutual funds into joint ownership with his daughter Paula. When he
learned that transferring his investments to his daughter might trigger a deemed
disposition for tax purposes, he wrote a letter stating that "he retained 100%
ownership and explained that the joint ownership with Paula was for probate
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 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
only done "for probate purposes."
The lower courts disagreed and found that Paula legitimately inherited the
account through the joint account.
The second 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 named Patricia on the account "for convenience purposes" only and thus no
true gift was made. As a result, the assets in the joint accounts should be
distributed in accordance with the will, with both siblings receiving a portion
of the funds. The lower courts agreed.
The Supreme Court is expected to release its decisions in the cases early in
2007. If the JTWROS status of an account is not respected, says Joel Skapinker,
counsel to Ms. Brooks, "there can be no gift that is safe."