Joint Adventures: The Dos and Don’ts of Owning Assets Jointly for Estate Planning Purposes
If you happen to live in provinces like Alberta or Quebec with only token probate fees, planning to avoid them may be like wearing a tuxedo to barbeque– far more of a hassle than it’s worth. Both these provinces have capped fees that will probably cost you less than a two night’s stay at a good hotel. Yes, there is still the hassle and delays that can go along with the probate fee. You may also need to pay a legal wordslinger to guide you through the process, which can add several thousand dollars more to the bill but, most of the time, the total bill still isn’t enough to motive most of us to take additional steps while above ground. Furthermore, Quebec has different laws than the rest of Canada anyway, so the rest of this article doesn’t apply to those of us who own chateaus by the St. Lawrence in any event.
On the other hand, if you live in place like Ontario or British Columbia (or own land in either), you may not be so laissez fair about the prospect of paying yet another tax bill. In B.C., the fees are essentially 1.4% of the value of the assets distributed through your Will, while in Ontario it’s about 1.5% (although both provinces use lower rates for the first $50,000 of assets).
Although each of us has our own tipping point, at some stage many of us might start searching for Plan B when the total probate fee bill hits critical mass. For example, although the thought of paying $4,200 on a $300,000 estate might not be a sufficient spur to action, maybe paying $14,000 on a $1,000,000 estate is enough to raise the battle cry. If you’ve reached this threshold, one of the options you may have considered is transferring assets into joint names. The rest of this article explains how this works, the potential problems that can arise and what you can do to increase the chances of things working out just right.
Joint Tenancy – The Basics
A true joint tenancy with the right of survivorship is the ultimate example of winner take all. If ownership of land or a bank account is set up with this form of ownership, the surviving owner or owners automatically inherit the deceased’s portion. As this transfer of ownership just happens as a right of law, the financial institution or land title office doesn’t need any additional authority or protection to transfer the asset to the surviving owners after confirming the other owner’s death.
This fact is the secret ingredient that makes joint tenancy planning to avoid probate fees work; essentially the entire probate process boils down to a judge issuing a letter confirming the validity of the Will that the executor can take around to the various banks, investment firms and land title offices in order to compel them to transfer ownership to the executor. Thus, if you own assets jointly with a right of survivorship, you don’t need this letter to transfer ownership and you don’t need to pay the associated probate fees.
When Joint Ownership Doesn’t Mean Joint Ownership
For those of you think you’ve cracked the code and can flip to the next article, not so fast! This is where things start to get interesting and just a little complicated. If you don’t know what you’re doing and don’t execute the proper documents, putting assets into joint ownership can cause a host of problems that might make probate fees the least of your worries. Many of them arise if there is any confusion about your true intentions behind adding new joint owners. There are actually three different possible outcomes, each with their own consequences. For example, if mom decided to put her 3 sons on title to her home, this might ultimately be interpreted by the courts or the Canada Revenue Agency in any of the three following ways, each with different ramifications:
- Immediate Change in Ownership. In this case, the three sons actually own 25% of the property each and can do with it what they like. Not only can this be a problem if mom and the boys no longer see eye to eye, it can be rather unpleasant if the boys have creditors or get divorced. On the income tax side, as the place was mom’s home, there won’t be any immediate income tax bill. If it was a stock portfolio or rental property, however, mom would need to pay capital gains tax on 75% of her portfolio, as she just gave this portion away. Returning to the current example, although there is no immediate tax hit because of the principal residence exemption to capital gains, mom is still creating a future tax headache. Unless the boys are all living in the basement sharing a man cave, their respective 25% interests will be subject to capital gains on the increase of value from when they went on title until sale. In other words, they have created an unnecessary income tax bill on the increase on their 25% shares when if they’d left things well enough alone, the entire property would have been inherited capital gains free and tax would have only been paid on any increase in value from mom’s death onward.
- Gift of Right of Survivorship Only: In 2007, the Supreme Court of Canada changed a bunch of the assumptions about joint ownership and, for good measure, created a new possible outcome. As a result, it is now possible to gift the right of survivorship only. In other words, although the boys may be added as joint owners now, they really don’t own anything until mom undergoes the ultimate downsizing. On the bright side, this protects mom from the boys during life, as they are only on title as trustees for her benefit. Moreover, as the boys don’t own anything while mom still breathes, their disgruntled spouses and avaricious creditors don’t have a claim against the house. Even better, since mom hasn’t really given the boys the house (only the right to inherit at her death, which she is free to revoke along the way), mom can continue to claim the principal residence tax exemption against the entire property, which means the capital gains tax at her death would be the same as if she’d never added the boys to the title.Does this sound like the perfect solution? Maybe yes but maybe no. Consider this scenario: one of the boys dies before mom and is survived by four sons of his own. Since true joint tenancy with the right of survivorship means winner takes all, his two brothers end up inheriting the entire property and his four sons are left out in the cold. Moreover, perhaps mom thinks one of her sons is too irresponsible to manage any inheritance or is worried about that son’s marriage or creditors. In that instance, even though they may have avoided the creditors and other problems during mom’s life, if the son owes money at mom’s death, then these creditors may end up as one of the true beneficiaries when the son converts mom’s casa into cash.
- Ongoing Trustee Relationship: In this scenario, the boys remain trustees for mom’s benefit during her life but, once she dies, they remain trustees on behalf of her estate. As trustees of her estate, they are bound to distribute the house according to the terms of mom’s Will. This option avoids creating the capital gains bill that goes along with an immediate transfer of ownership while simultaneously benefiting from all the “if, ands and buts” found into a good Will. In other words, if one boy dies before mom, a properly drafted Will can protect his descendants by requiring the surviving brothers to distribute their deceased’s siblings share to his kids. This same Will can also ensure that a young, incapacitated, frivolous, indebted, drug-addicted or divorcing son’s share will be held in trust rather than given to that person directly, which may solve at least some of these problems. Even if none of these problems exist and everyone dies in the right order, there may still be significant income tax benefits for the sons’ families if they inherit in a trust and each son can distribute some of the income that might have otherwise shown up on his tax return to a low income child’s return instead. These savings are still possible despite the changes to trusts created in Wills that spring into action in 2016.Is this the perfect solution? Once more, not so fast. This strategy only works if all of mom’s other assets that would otherwise require probate, such as her car, other property, investments, private company shares and bank accounts are either jointly owned as well or avoid probate through other strategies. If one asset requires probate, it might be enough to drag all the jointly owned assets the boys hold on trust for the estate into the mix and send the probate fee bill through the roof. As well, since the assets are still distributed according to the terms of mom’s Will, these assets might be liable to Will challenges. While never having to apply for probate may be enough to prevent any Will challenge from starting, there may be other ways of avoiding probate and Wills challenges worth considering with less chance of comebacks.
- Legal Presumptions: Noting there are three different potential outcomes, which one applies if nothing is putting in writing? Ultimately, it all comes down to mom’s intentions and how clearly they are communicated. If it remains a mystery or the boys have different stories, a judge will have to look at the surrounding circumstances and try to figure out what mom really wanted. When making this determination, a judge starts with the assumption that the boys continue to hold on behalf of mom, then her estate, unless the boys can prove otherwise (unless the child is a minor, in which case it was assumed that he was intended to inherit).On the other hand, the CRA may look at things completely differently. Although they are willing to acknowledge that there is no true transfer of ownership when the boys went on title, they often require proper documentation drafted at the time of transfer confirming mom’s plan In other words, unless you have the proper documentation, the CRA may still come calling for tax owing at the time of transfer and / or for subsequent growth after that time even if you do avoid probate.
What To Do Next? If this article has intrigued you in any way, here is my suggestion of what to do next:
- Consult with a Lawyer. As the expression goes, there is more than one way to skin a cat. Although joint tenancy planning is one option, it’s not the only one. Moreover, it might not be the best in some situations. If worried about Will challenges, gifting during life, using other types of trusts or assets with beneficiary designations like life insurance might be a safer way to go;
- Compare Costs and Benefits. I always suggest getting an idea of the costs before committing to a course of action and comparing the costs for different alternatives. In addition to the legal costs of drafting the necessary legal documents, there are the costs of transferring property and, for some assets in some provinces, Property Transfer Tax. Moreover, in some cases, such as if mom has a mortgage on the property, the bank may need to approve the transfer. If dealing with investments, I’d also suggest consulting with your investment advisor as well to ensure that there aren’t any additional surprises, such as deferred sales charges. It may also mean opening new accounts rather than just adding the sons to the existing ones.
- Compare the Different Joint Tenancy Options. In most cases, the choice is between the second and third options. Most lawyers prefer the third option because it benefits from the contingency planning of the Will and lets people use trusts created in the Will to protect younger or troubled heirs from themselves. On the other hand, every situation is different so it’s better to compare than assume.
- Work with a Lawyer to Draft the Necessary Documents. If you haven’t gotten the point by now, clarity is key. That’s where the proper legal documents come into play. Not only does a document like a bare trust clarify mom’s intentions, having the sons sign this document, which confirms their obligations to their mom, including transferring ownership back to her upon demand, protects her from them if they have a disagreement. It also hopefully saves a lot of time and money if the sons ever divorce or have creditor issues. Even if a court ultimately sides with mom despite a lack of documentation, having the paperwork in place hopefully causes the creditors to back off before everyone is several thousand dollars poorer in legal fees. In some cases, mom might even want the boys to sign an irrevocable power of attorney over the land or even an unsigned property transfer form so that mom can transfer the property back into her own hands any time she wants, not only in the event of disagreement but also if one of the boys becomes incapacitated. Finally, having this formal agreement in place is also a great way of keeping the CRA off your backs.
When helping clients with their estate planning, probate fee planning is seldom the first (or even second or third) priority. In fact, it’s not even the highest tax planning priority; as I tell clients, probate fees are like a paper cut while income taxes can be more like an amputation. On the other hand, as most of us know, paper cuts can still really sting; likewise, for bigger estates, a small percentage fee can still result in some rather big numbers.
If you live in a high probate province and want to take steps to avoid probate and the related costs, or even just to simplify things for your executors, then joint tenancy planning might be the thing for you. On the other hand, it’s seldom your only option and, if not done correctly, can cause far more problems than it solves. Accordingly, if considering this step, I strongly recommend taking the additional step of getting proper legal advice so this potential solution doesn’t turn into a real problem.