When thinking about estate planning, many clients focus on two key goals: minimizing taxes and ensuring their families can administer their estate smoothly after death.
One strategy frequently used in British Columbia is joint ownership between parents and adult children. Assets are often registered jointly with the intention of simplifying matters later. While joint tenancy can offer advantages, it also carries significant legal and tax risks that require careful planning.
The Appeal: Avoiding Probate
The primary reason parents add a child as a joint owner is to avoid probate.
Probate is the court process that confirms a Will is valid and authorizes the executor to administer the estate. Probate helps to eliminate fraud and create transparency in estate administration, but it also has a cost.
In British Columbia, probate fees are approximately 1.4% of the value of assets that pass through the estate (about $14,000 in fees on a $1,000,000 estate). Probate fees must be paid prior to the court issuing a grant of probate.
Probate can also take several months to complete, potentially delaying access to funds needed by surviving family members.
Assets held in joint tenancy pass to the living joint owner by right of survivorship. Jointly held assets typically do not require a grant of probate. In theory, this saves both time and probate fees.
However, the legal reality is more complex. Joint tenancy arrangements can create legal relationships and obligations that are not always fully understood at the time the asset is transferred into joint ownership.
Risks
The individual adding a joint owner onto their asset, is opening themselves up to risk.
The original owner loses control over their asset. If the original owner wants to sell or re-finance, they need the joint owner’s approval.
Further, the asset may become exposed to any personal claims (i.e. from creditors, due to divorce etc.) of the joint owner.
Joint tenancy planning is often implemented when the parent and child have a healthy and close relationship. If the parent and child’s relationship deteriorates in the future, it is not simple or may not be possible to remove the child as an owner of the asset.
The Presumption of Resulting Trust
In British Columbia, when a parent adds an adult child as a joint owner on their asset, the law presumes the child is holding the asset in trust for the parent. This is known as the “presumption of resulting trust.” This presumption does not apply to assets held jointly with a spouse.
During the parent’s lifetime, the child is presumed to hold the asset as a bare trustee for the parent. After the parent’s death, the presumption is that the asset forms part of the estate, unless there is clear evidence that the parent intended the child to receive it beneficially.
This presumption can create unintended consequences.
Intent of Joint Tenancy
Many parents add a child to an account simply for administrative convenience, such as assisting with bill payments or banking. Legally, this often creates a bare trust relationship. Depending on the circumstances, the child may have trust reporting obligations, including filing a T3 Trust Return with CRA, and a Land Owner Transparency Report for real estate. Whether a bare trust relationship exists or not depends on the parent’s intent behind adding their child as a joint owner on the asset.
After death, disputes can arise.
A parent may add a child to their bank account with the intention after death the account be distributed in accordance with their Will. However, after the parent’s death the bank may transfer the account to the child who was joint owner of the account, without investigating the parent’s intention, or applying the presumption.
Conversely, if the parent’s intention was for the child to receive the bank account as a gift, the parent’s other children can make the argument that the presumption applies, and the funds should form part of the estate.
Either way, there is confusion. Confusion may result in litigation, which may cost the estate more in legal fees and time than a probate application.
Tax Considerations
If a parent adds a child as a joint owner of their asset, this may constitute a disposition for tax purposes.
If the asset is the parent’s principal residence and the child does not live in the home, the availability of the principal residence exemption may be in question on the transferred portion.
Capital gains implications can arise both at the time of transfer and on death. Improper planning can result in unexpected tax liabilities.
Joint Tenancy with a Spouse
Joint ownership between spouses is not treated the same as joint ownership between a parent and child. Joint tenancy planning can be a helpful tool between, spouses where a spouse intends to leave an asset to their spouse after the owner’s death. Although individuals should still be mindful of any tax implications for transferring an asset into joint ownership with their spouse.
Documentation
The key to joint tenancy planning is clear documentation of intention at the time the joint ownership is created. Without written evidence, courts will apply legal presumptions that may not reflect the parent’s wishes. Most disputes about joint tenancy planning arise after the parent’s death, when they are no longer able to explain their intention.
Joint tenancy can simplify estate administration but when implemented without proper planning, it can create disputes, tax exposure, and outcomes that contradict a parent’s intention.
Each person’s legal, tax and family dynamics differ, and requires individualized advice to ensure their plan aligns with their estate planning goals.
This article is authored by Kiran K. Dhesa, Wills and Estates Lawyer at Richards Buell Sutton LLP (RBS). Established in 1871, RBS is the oldest law firm in British Columbia with offices in Surrey and Vancouver. Kiran is a member of the firm’s South Asian Practice Group and advises on a wide range of Estate Planning and Estate Administration matters, including Wills, Incapacity Planning, Trusts (Family, Joint Partner and Alter Ego Trusts), Estate Administration (Probate), Committeeships and more.
