If any good came out of the bare trust tax-filing mess of earlier this year, it’s the realization for many people that they have to up their game in estate planning. Choices like adding an adult child to a bank or investment account are a practical way to help seniors manage their finances, but there may be unintended consequences.
Barbara Amsden, a financial industry veteran, will launch a new book on July 15 to help people with estate planning called How to Laugh at Death and Taxes: What Willmakers, Executors, Heirs, and Beneficiaries Need to Know. In the Q&A that follows, Ms. Amsden talks about bare trusts, powers of attorney and more. Here’s an edited version of exchange by e-mail:
Q: Barbara, can you tell us a little about your background and how you came to write your book?
A: I’m the product of a bank economist and an insurance actuary, so I couldn’t escape my fate of 35 years’ servitude in the financial services industry – banking, securities, mutual funds, capital markets and the plumbing that keeps them all working. I foolishly thought I knew a lot about what it would take to be an executor for a ‘simple’ estate that was pretty much all-cash and had no fighting beneficiaries. But I didn’t – there were bank, legal, accounting and tax issues to grapple with. With my role as executor once again looming, I wanted to find and offer an easier way for executors to survive.
Q: What do you make of the Canada Revenue Agency’s requirement that you must file a T3 form if you’re the trustee of a bare trust, an arrangement that as of earlier this year could be as simple as joint owner of a bank account with an elderly parent? The shock and anger over this new reporting rule suggests people made estate planning choices without fully understanding the implications.
A: Why the CRA expanded the requirement to file T3 trust forms to include bare trusts was understandable – some people don’t pay their taxes. How it was introduced – poorly timed, unclear, overcomplicated – was not. And while bare trusts have been exempted from trust reporting requirements for 2023 (due March 30, 2024), this is only a delay.
The shock and anger also are understandable. Many people think using trusts as a way to reduce taxes as part of estate planning is what rich people do. Few know what bare trusts are, or have an inkling they could include an account held jointly by an adult child and elderly parent to help make routine payments. However, people holding such convenience accounts with parents can breathe a bit easier: a less-well-known feature of the T3 rules is that trusts with less than $50,000 in assets, and plans such as RRSPs, RDSPs, RESPs, RPPs and TFSAs, don’t have to be reported.
Q: What do you consider the better option for seniors who want help managing their financial affairs – asking adult children to be joint account holders or giving them power of attorney for property-related decisions?
A: Both can be good options and both can come with downsides – the risk of adult children withdrawing money for themselves or ignoring the grantor’s wishes, although the extent of both a POA and the amount held in a joint account are good safety rails. Also, it’s possible and can be practical to both grant a POA for larger assets and establish a joint account for expediency.
My general preference for a POA is that the accounts they extend to form part of the estate, while a joint account does not – at least not automatically. A person with a parent’s POA doesn’t expose the parent’s assets to the POA holder’s creditors or risk becoming part of family property if the POA holder has a marriage breakdown. However, a POA ends when the POA grantor dies and so cuts off access to the parent’s assets to pay for ongoing expenses. This inconvenience can be solved by making other arrangements.
While some people shy away from a POA because they worry about legal fees, don’t understand or trust them, or prefer the greater ease of setting up a joint account, the joint account route alone is unwise. Jointly owned bank accounts and houses have been described as magnets for family disputes and expensive lawsuits. One lawyer put it succinctly: “Joint ownership with spouse = likely good; joint ownership with adult child = very risky!”
As both options can be right (or wrong) depending on circumstances, here are a couple of rules of thumb. Parents should make their intention regarding the disposition of jointly owned property very clear in their will and other documentation. They should review who holds their POA and with whom they hold a joint account periodically because things change. And even in the happiest of families, it’s a good idea to avoid the conflict of interest of having a single adult child as sole joint holder and sole executor of the will as it leaves sibling beneficiaries with virtually no power. The stories I’ve heard …
Q: What about using joint accounts as a way of avoiding probate?
A: Using a joint account or adding a person to the title of a house are legitimate ways to pass on value without it being subject to probate and the associated costs. But it’s not guaranteed to avoid problems. The nature of a joint account can be challenged by beneficiaries, creditors or probate or tax authorities if the account is being used for more than routine transactions. For example, to avoid probate tax or to reduce what other beneficiaries are entitled to. As with most things, look at risks and rewards.
Stay tuned for Part Two of this Q&A with Barbara Amsden, which will cover corporate executors for people who have no children and cost of probating a will.
Subscribe to Carrick on Money
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob’s personal finance reading list
Food inflation as seen in 10 staples
A look at how prices for food have changed since 2002. What’s interesting here is how prices for some items have fallen a bit from 2022 level.
The cost of keeping cool in summer
A trends piece on how people are using air conditioning, including some interesting data on how much it costs to run an air conditioner and fan.
Housing affordability update
This analysis shows that affordability worsened in 11 of 13 markets studied. Toronto and Halifax were the outliers. It’s expected that lower mortgage rates will help improve affordability, but that’s not a done deal. Lower borrowing costs could attract more buyers, which in turn pushes up prices.
Podcast fans
Subscribe to Stress Test on Apple podcasts or Spotify.
Ask Rob
Q: My insurance agent says I may get a discount on my home insurance if I let the insurance company access my credit record. An internet search says credit records can help insurance companies better assess your risk level. What are the pros and cons of giving them access to this info?
A: Credit scores are used by lenders, prospective employers, landlords and, yes, insurance companies to help predict how people will behave. Will they pay what they owe, be reliable, manage their affairs well – you get the idea. Allowing an insurance company to check your credit score might get you a lower premium if you have a good score, or vice versa if you have a lower score. Insurers should do a ‘soft check’ of your credit score, which means there will be no impact on your score. Hard checks are done by lenders assessing whether to grant a loan and can have the effect of lowering your score.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools and guides
More info on soft versus hard credit checks. The difference is how they affect your credit score.
In the social sphere
Social Media: An amusing post on X about the phantom costs of home ownership.
Watch: A clever take on overconsumption – buying too much stuff, in other words.
Money-Free Zone: I’m thinking of this for my personal theme song – Wanna Do My Thing, by the Kenyan funk band Matata.
More PF from The Globe
- Need a will? Why banks may give you a discount to get it done
- Many Canadians underspend in retirement for no good reason. Here’s what they can do
- Having the Talk: Navigating End-of-Life Issues with Aging Parents
