The Dangers Of Joint Ownership With Your Adult Children
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. Trying to avoid probate fees may seem like a good idea, but joint ownership can create a whole host of problems for people, as described below. These problems are far more costly than a mere 1.4% tax.
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 (for most adult children, their parent’s property will be their ‘second’ property and thus considered an investment property) 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 assets 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 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. Your asset becomes their asset and thus exposed to their misfortunes. You may think to yourself “my children are good kids and don’t have money troubles” but what if they accidentally hit a pedestrian on a crosswalk and get sued? Your asset, now held jointly with them, has just become exposed to the result of that litigation. No one has a crystal ball.
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 the purpose of mitigating probate fees.
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. This could have a significant tax impact, much larger than the probate taxes that would be eventually payable.
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.
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.
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!
This is provided as information ONLY; it should NOT be construed as legal advice. You should consult with a lawyer to provide you with specific advice for your own situation. For more information on estate planning/incapacity planning and to discuss your specific circumstances, please contact Vanessa DeDominicis on 250-869-1140 or firstname.lastname@example.org. Vanessa practices in the area of Wills and Estates at Pushor Mitchell LLP in Kelowna and would be more than happy to assist you.