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Probate Taxes & Joint Assets

More often than not, I am asked whether it makes sense for elderly parents to add an adult child as a joint owner on their bank accounts or homes, one of the main reasons being to avoid estate administration tax, or probate tax, as it still commonly known.

This used to be a simple way to avoid probate tax, which is, in essence, calculated on the value of the assets in a person’s estate. It worked because as joint owners with the right of survivorship, each owner had a one hundred percent undivided interest in the asset, and upon the death of one owner, the survivor(s) would automatically become the one hundred percent owner(s) of the asset. As such, the joint asset would not form a part of the deceased owner’s estate.

However, in 2007, the Supreme Court of Canada ruled that joint assets held by an elderly parent and adult child would not automatically pass to the adult child by right of survivorship.1 In fact, the law now presumes that the adult child holds the assets jointly with the parent in a “resulting trust” for the benefit of the parent’s estate; that the assets transferred into joint ownership with an adult child are intended to form part of the parent’s estate upon the parent’s death and administered in accordance with his or her will.

Take, for example, a situation where an elderly, widowed dad can’t get around easily anymore and adds one of his three daughters to his bank account, his only asset, as a joint owner so that she can access funds for him, and help him with paying bills. Before the Supreme Court’s decision, when dad dies, the account, by right of survivorship, would pass to the daughter and all the funds would be hers to do with as she pleases. Now, however, with the presumption of resulting trust, the funds would fall into dad’s estate and presumably shared amongst all three of daughters.

If a parent’s intention is to have a joint asset pass by right of survivorship to his or her adult child, the parent needs to clearly document this intention. It is not enough for the child to state that this was the intention. Carefully drafted language, which can be included in the will, can rebut the presumption of resulting trust and allow the asset to be transferred to the adult child, bypassing the estate and thus the probate tax on that asset.

Despite the ability to rebut the presumption of resulting trust, I rarely recommend adding a child as a joint owner of an asset. The risks of joint ownership with an adult child and the benefit of the 1.5% savings of probate tax should be seriously considered with regard to each personal situation. Not only is total control over the asset lost, but the asset is then also available to each joint owner’s personal creditors in the event of default on their debt obligations. This means, for instance, that you would have to get permission from your child to sell your home, if your child’s creditors hadn’t already sold it from under your feet to settle your child’s debts. And to remove the child as a joint owner would require his or her consent. Further, there are potential tax issues that arise when certain assets are transferred to an adult child as a joint owner.

If you are thinking about transferring any of your assets to an adult child as a joint owner, especially if the intention is to avoid probate tax, call me first to discuss the benefits and consequences of the transfer, and if the transfer will even meet your objectives.

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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