Many Canadians may be tempted to minimize probate fees by making their adult children joint owners of a property or an investment account. But experts say it’s a decision that, if not done carefully, can cause more harm than good.
When someone passes away, any of their jointly owned assets or investment accounts pass directly to the other owner of the account, without incurring probate fees, by right of survivorship. People typically name only one joint owner on an asset. Registered accounts, such as registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), cannot be jointly owned.
While assets jointly held between spouses will pass without issue, “where it becomes an issue is the wealth transfer area” to someone other than a spouse, said Kristine Anderson, founder of estate and family law firm Fern Law in Toronto.
Canadian estate law presumes that if the deceased jointly owned assets with their spouse, they intend for those assets to pass directly to their spouse. But the same presumption does not exist for adult children, Ms. Anderson said.
“The presumption is that you’re doing it out of convenience and you don’t intend for the child to receive it outright, that it is still an asset of your estate and that it should flow according to what you have in your will,” she said, noting parents can add their child as a joint owner for numerous reasons, including as a safeguard against cognitive decline issues.
People who do intend for an asset to flow directly to their adult child should document that in their will or in a letter making it clear the asset is a gift, she said. Failure to do so is “where we see the most litigation,” particularly when the parent has other children who were not informed of the arrangement.
“If anyone has more than one child … they can still do it but they need to make it clear that it is a gift or it isn’t, so everybody understands what’s going on,” she said. “Talk to your kids, don’t let it be a surprise.”
Joint ownership could also expose an adult child to capital gains that they otherwise wouldn’t have had to pay, Ms. Anderson said. When a parent adds their child as an owner on a property or investment account, it’s as if half of the asset has been sold, and the adult child begins incurring capital gains on the asset from the date of its transfer to the moment it’s eventually sold.
In the case of a property, if the child isn’t living there and can’t avail themselves of the principal residence exemption, “it can create a whole exposure … that is going to be a rude awakening when [they] go to sell it,” Ms. Anderson said, noting that the transactions can also trigger land transfer tax obligations for the adult child.
In the example of an estate worth between $1-million and $2-million, the probate tax would be between $14,000 and $30,000. If the majority of that estate was locked up in the family home, the capital gain on that asset could be a significantly higher payment, Ms. Anderson said. Capital gains are taxed at the inheritor’s income tax bracket, meaning high-earning adult children could face a much more hefty tax bill in the future.
Kirsten Nelms, principal and associate portfolio manager at Leith Wheeler Investment Counsel Ltd. in Vancouver, cautioned that once someone names their child a joint owner of their investment account, they lose control of those assets. Joint ownership requires that both parties sign off on any investment decisions and account withdrawals.
“You want to trust your child and assume they have your best interests [at heart], but family dynamics can be very complicated,” she said, adding that naming a future beneficiary as a joint owner is “somewhat of a conflict of interest,” because the less the parent spends, the more the child stands to inherit.
Jointly owning assets with a child also exposes those assets to any of the child’s potential creditors, as well as creditors of the child’s spouse, Ms. Anderson said. If the child’s marriage breaks down, the jointly held assets could also be exposed to equalization unless the child and spouse signed a marriage contract.
However, there are situations in which joint ownership makes sense. If a parent wants to ensure the family cottage stays in the family but no longer wants to be responsible for it, they can add their child to its title, Ms. Nelms said.
Parents who either didn’t have a spouse or whose spouse has already passed on, and who only have one child who would receive the entire estate anyway can benefit from adding the child as an owner of their assets, Ms. Anderson said.
Ms. Nelms said people are often entering into joint ownership arrangements due to incorrect assumptions about the probate experience.
People often assume probate fees will eat significantly into their estate, but in reality they work out to 1.4 or 1.5 per cent of the total estate. They’re also often trying to get around the potential for a drawn-out process of settling their estate, but “most people, when they pass away, they have maybe a house or they downsized to a care home, they have a couple of investment accounts. Often those kind of probate processes don’t take a year, they maybe take four to six weeks.”
Iftikhar Mahmood, certified financial planner at CreateWealth Planning in Markham, Ont., said that he typically advises clients worried about their executor facing a significant probate liability to get a life insurance policy rather than making their beneficiaries joint owners of their assets.
“It’s the simplest form of insuring, regardless of how the estate is set up, that any potential liability will be taken care of,” he said.
Editor’s note: A previous version of this article incorrectly stated that people can name only one joint owner of an asset. Multiple people can be added as joint owners; however, typically ownership is jointly shared with only one other person. This version has been updated.
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