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JOINT TENANCY AS AN ESTATE PLANNING TOOL
- PROS AND CONS
(March 2001)
by Del Elgersma
Estate planning means different things
to
different people, but most people agree
that
some of the goals of estate planning
include:
- Simplifying the administration of an estate
- Minimizing probate fees
- Ensuring that property passes to the intended
person
One of the most common strategies used to
achieve these goals is to own property with
another person in a joint tenancy.
Joint tenancy or tenancy in common
Property owned by more than one person
must
be owned in one of two ways: joint
tenancy
or tenancy in common. In practical
terms,
the chief distinction between joint
tenancy
and tenancy in common is the right
of survivorship.
Only joint tenants enjoy right of survivorship.
If you own property with another person
as
tenants in common, on your death your
interest
in the property becomes part of your
estate
to be passed on according to your will.
If
you own property with another person
as joint
tenants, on your death your interest
in the
property passes to remaining joint
tenant(s)
by right of survivorship. It does not
form
part of your estate.
The law presumes that an asset (other
than
land) held in two or more names is
owned
as a joint tenancy, unless there is
an indication
that the owners own it in shares. So,
for
example, household goods, vehicles,
bank
accounts and investments owned by two
or
more persons will be presumed to be
owned
by them as joint tenants, unless their
respective
shares of the assets are specified
or there
is a statement that the asset is held
by
the owners as tenants in common.
However, in the case of land the common
law
presumption of joint tenancy has been
altered
by statute, so that land owned by two
or
more persons is presumed to be owned
by them
as tenants in common unless the title
expressly
states that they are joint tenants.
Right of Survivorship
Because of the right of survivorship,
a joint
tenancy can meet the estate planning
goals
of simplifying the administration of
an estate,
minimizing probate fees and ensuring
that
property passes to the intended person.
It
is a strategy used by the majority
of married
couples, who own their major assets,
such
as their home, as joint tenants.
The right of survivorship ensures that
when
the first spouse dies, these assets
pass
to the surviving spouse without being
subject
to the delays and expense of an application
for probate (with a little extra planning,
it is often possible to avoid probate
altogether
on the death of the first spouse).
The right
of survivorship also ensures that ownership
of the assets will not be affected
by claims
under the Wills Variation Act, if there
is
a will, or by the rules for intestate
distribution
under the Estate Administration Act,
if there
is no will.
Beware of the Consequences
While joint tenancy is most common
between
spouses, it is becoming increasingly
common
between parents and children. The purpose
is the same - to simplify administration
of the parents' estates and to minimize
probate
fees. Often the joint tenancy is created
after the death of one of the parents.
However,
this can result in some unintended
and undesirable
consequences. Consider the example
of a parent
who has transferred her assets into
a joint
tenancy with one of her adult children:
Loss of control
The parent cannot later cancel the
transfer
if she changes her mind. As well, in
the
case of land, she will not be able
to sell
or mortgage the land unless the child
also
signs.
Income tax
The transfer is a disposition for income
tax purposes. The 50% interest in the
property
transferred to the child is deemed
to have
been sold at its fair market value
and, unless
the asset is the parent's principal
residence,
a portion of any capital gains will
be added
to the parent's income. This could
result
in the parent having to pay tax even
though
she received no payment from the child.
In addition, one half of any future
capital
gains will accrue to the child. If
the property
is the parent's principal residence
and the
child lives elsewhere, the principal
residence
exemption will be lost for the child's
share
of any future increase in value of
the home.
Property transfer tax
In the case of land, property transfer
tax
will be payable at the time of transfer,
although there may be an exemption
available
if the property is the principal residence
of either the parent or the child.
Exposure to creditors
The child's interest in the property
will
be subject to claims by the child's
creditors.
If the child is married and the property
is used for a family purpose, it could
be
subject to claims by the child's spouse
if
there is a breakdown of the child's
marriage.
Death
The child may pass away before the
parent,
negating the purpose of the joint tenancy.
If other children were also on title
with
the parent as joint tenants, on the
death
of the parent the asset would pass
only to
the surviving children, and the family
of
the deceased child would receive nothing.
Resulting trust
The law presumes that a joint tenant
who
contributed nothing toward the property
holds
his or her interest in trust for the
contributing
owner. An exception is the presumption
of
advancement (meaning a gift in advance
of
a person's death). According to case
law,
the presumption of advancement applies
to
transfers of property from one spouse
to
both spouses, or from a parent to a
child.
However, the presumption can be rebutted.
Accordingly, if the child has other
siblings,
they might claim that the child holds
the
property in trust for all of the children,
while the child with title would claim
that
the right of survivorship applies.
This could
also arise if the joint tenancy resulted
in property passing to children to
the exclusion
of a spouse, or to a spouse to the
exclusion
of children.
Some of the factors that may rebut
the presumption
of advancement and suggest that the
child
holds the property in trust for the
parent's
estate include the following:
- the parent was the sole owner of the property
prior to the transfer
- the property was controlled exclusively by
the parent
- the child did not report any of the income
from the property on the child's income tax
return
- the child did not receive or spend income
generated from the property
- there is evidence that the joint tenancy
was created simply to avoid probate fees
or to provide immediate access to the parent's
funds after death (e.g., for funeral expenses.
Another unintended result can occur if spouses
in a second marriage own property together
as joint tenants, and each have children
from previous relationships. On the death
of the first spouse, the property will pass
by right of survivorship to the surviving
spouse. The spouses may have had wills that
provided that the property would ultimately
pass to the children of both spouses, on
the death of the last of them. However, the
surviving spouse can change his or her will
so that the property goes only to that spouse's
children, and the children of the deceased
spouse would receive nothing.
Put it in Writing
To avoid the possibility of a dispute
between
the child and any other spouse or other
children
of the parent, it is a good idea to
put the
parent's intention into writing. If
the transfer
to joint tenancy would not result in
capital
gains tax, or the parent is prepared
to pay
the tax, the parent could sign a deed
of
gift to confirm that beneficial ownership
in the property is transferred to the
parent
and child as joint tenants with right
of
survivorship. On the parent's death,
it would
be difficult for other beneficiaries
to argue
that the child holds the property in
trust
for the parent's estate.
Alternatively, the parent could require
the
child to sign a declaration of trust
confirming
that the child does not have beneficial
ownership
in the property, but simply holds his
or
her interest in trust for the parent.
In
addition to reducing the possibility
of a
dispute between the child and the other
beneficiaries
of the parent's estate, the declaration
provides
the parent with a greater amount of
control
over the property, and may prevent
the deemed
disposition of the property for income
tax
purposes (because beneficial ownership
of
the property remains with the parent).
However, Canada Customs and Revenue
Agency
("CCRA", formerly Revenue
Canada)
has suggested that the existence of
a declaration
of trust will not, in and by itself,
be conclusive
evidence that beneficial ownership
of the
property has not changed. It would
depend
on all of the circumstances.
CCRA's position is that if legal
title
to
an asset is transferred from a parent
to
the parent and a child, but beneficial
ownership
remains with the parent (as confirmed
by
the declaration of trust and other
circumstances),
a disposition for income tax purposes
has
not occurred. Having said that, CCRA
pointed
out that in such a situation a true
joint
tenancy with the child would not exist
and,
in its opinion, the goal of reducing
probate
fees would not be achieved because
the property
would not pass to the child by right
of survivorship.
Joint tenancy can be an effective
part
of
an estate plan, but must be used with
caution.
If you have questions about creating
a joint
tenancy or other estate planning strategies,
call us first for professional advice.
For a discussion of other strategies to avoid probate and probate
fees, click here.
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