Pitfalls Of Joint Ownership

By Theresa Arsenault

Probate fees of 1.4% of the gross value of assets located within British Columbia and passing through an estate in British Columbia are payable to the BC government at the time an estate is probated. In an effort to avoid these fees, people often transfer assets into joint tenancy with one or more of their children or others. This can create a whole other set of problems for people as we’ll describe below.

Capital Gains Issues

The transfer of any property in Canada results in capital gains tax becoming payable on the increase in value since the property was acquired, except in certain cases where exemptions are available. There is an exemption for your principal residence and exemptions for active small businesses and family farms, but not for an investment property or a stock portfolio. The transfer of an investment asset into joint names has the unintended tax consequence of triggering capital gains tax, which tax would be payable at the time your next return is due. The probate fee only becomes payable on death, so transferring your stock portfolio into joint names may in fact accelerate a payment of capital gains taxes in a far greater amount than the probate fees you were seeking to avoid, which may not have become payable for many years.

Claims by Creditors and Ex-Spouses

Adding your child’s or children’s name to title to your property, bank account or stock portfolio can have the unintended effect of making those assets subject to claims by creditors or ex-spouses of the children who were added to title. To try to protect against this a trust declaration can be done to show that the child has no beneficial interest in the asset which is partially in their name, but many people do not want to have to defend the ownership of their asset against the claim of a creditor of one of their children when their child’s name was added strictly for probate fee avoidance purposes.

Loss of Principal Residence Exemption

A transfer of a 1/2 interest in your home to a child as a joint tenant will result in the loss, when your house is eventually sold, of your principal residence exemption on the 1/2 interest transferred. In a time of rapidly rising real estate values, this could have a significant tax impact.

Dishonest or Forgetful Joint Owners

A further risk to adding a child’s name to ownership of your assets can arise where the child is not your sole beneficiary and the child, after your death, "forgets" that the child was holding that asset in trust for the benefit of the other beneficiaries of the estate. In order to avoid this problem, we recommend that a trust declaration be signed by the child at the time their name is added to title to the property or account to clarify that they will dispose of the property at the time of your death according to your will.

Loss of Control

Another issue that gives rise to concern for some people is the loss of some control over their assets which can arise with joint ownership, and in particular, with real estate. Although a joint bank account or a joint investment account only requires the signature of one party to deal with the assets or remove assets, the transfer or mortgaging of real estate requires the signature of all the registered owners. If you add a registered owner to title to the property, they will need to sign any documentation relating to the subsequent sale or refinancing of it. Some people do not wish to have to ask their children to be involved in those types of decisions or transactions.
 
Alternate Strategies

Although a transfer into joint names may work well in a limited number of cases, with proper trust declarations or statements of intention, other alternate strategies can be employed, such as joint partner trusts or alter ego trusts. Seek the advice of an estate planning specialist to discuss the alternatives before you transfer those assets!

For more information on Estate Planning Law, contact Theresa Arsenault at:
arsenault@pushormitchell.com or (250) 869-1110