Written by: Gali Gelbart, Estate and Trust Consultant, Scotia Wealth Management
One of the most common questions I get asked by clients is if they should add one or more of their children on title to their home or other real estate holdings. A lot of people like the simplicity of using joint tenancies to automatically transfer the property on their death. It certainly can be an attractive estate planning option, for example where a parent has one child who is the sole beneficiary of the parent’s entire estate. However, too often there are risks to using joint tenancy to distribute the real estate.
Joint tenancy is a type of ownership used in the common law provinces of Canada, whereby the owners are equal share owners of the entire property, and each has the right of survivorship. Many spouses for instance likely own their principal residence as joint tenants, allowing for an automatic assumption by the surviving spouse without having the home fall into the estate of the deceased spouse. Because of this, the home does not attract probate fees since it does not form part of the deceased person’s estate. This contrasts with holding property as tenants in common, where multiple owners can own shares in the property discretely, without a right of survivorship to the co-owners.
However, there are traps for the unwary. Canadian law presumes that when a parent gives an interest in property to their adult child, the child holds the property in trust for the parent (or the parent’s estate when the parent dies). This is particularly true if the transfer is gratuitous (the child does not pay for their share) and there is no written evidence regarding the intention of the transfer.
If the parent wants to ultimately give the property to the adult child, its certainly advisable to document this intention at the time of transfer by a deed of gift. Otherwise, the property will be included in the parent’s estate and attract probate fees, defeating the original aim of gifting the property directly to the child.
So, what are the advantages of using joint tenancy?
British Columbia, Ontario and Nova Scotia have relatively high probate fees (also called estate administration tax) compared to the rest of Canada. Coupled with the rapidly increasing real estate values across Canada, this is one of the strongest motivations for adding the intended beneficiary of the property on title as a joint tenant. When the transferor dies, the intended beneficiary takes complete ownership as the survivor. The transfer is quick and simple compared to probating the estate, which can take over a year or longer.
However, there are multiple risks of using joint tenancy for estate planning.
Let’s build on our original example. Instead of parents intending to leave their entire estate to one child, suppose a couple has three adult children, each with a family of their own. Now, let’s say that one of the children, Jane, lives close to Mom and Dad, and has spent her adult life taking care of their needs and helping with home maintenance. Mom and Dad feel that the family home should be given to Jane, while the other two siblings can share their remaining estate, so they go ahead and transfer title into Mom, Dad and Jane’s names in joint tenancy.
The first problem might be that the final estate is not liquid enough to equalize each child’s share if most of the value of the estate was held in the principal residence, particularly after the final tax bill is paid out of the estate. This situation creates family discord among the disappointed beneficiaries and has led to various court cases over the years.
Further, what if Jane predeceases her parents – there is no provision allowing Jane’s family to inherit her intended share as contingent beneficiaries. Thus, the parents have inadvertently disinherited Jane and her children if this occurs.
The second real concern is the loss of control over the home or other real property. Even if the parent might find they need to access the capital in the real estate as life circumstances change, they cannot easily transfer or mortgage their interest in the property without the consent of the other owners. In some cases, severing the joint tenancy or using a co-ownership agreement is preferred. For example, if a family vacation property is used occasionally by various family members, then each family member could own a proportionate share. This can help clarify how the property will be used and what happens when one of the owners needs to access the capital held in the property.
Third, following our example above, what if Jane has a marital breakdown or has creditors making claims against her assets? Jane’s interest in the parent’s home could be exposed to creditor or spousal claims.
Fourth, as with any disposition of property, there are tax considerations. When the parents transferred their interest into joint tenancy with Jane or perhaps multiple children, this disposition likely gives rise to a large capital gain. Some care must be given to applying the principal residence exemption, especially if the parents own multiple properties.
Along these lines, it would be wise to ensure there are property transfer tax exemptions available when the child is added to the title. In our above example, what if Jane wants to purchase her first family home with her spouse? Assuming she lives in British Columbia, she might have forfeited her ability to access the first-time home buyer’s exemption for the property transfer tax on her home purchase.
Overall, there are specific situations where adding owners on title as joint tenants will make sense and carries low risk. The very basic example was an only child of a first marriage, where the spouses have executed spousal Wills and their estate planning goal is to streamline the estate distribution for their sole beneficiary. However even in situations that at first blush sound simple, due consideration should be made to the overall asset mix of the estate, the final tax bill, and the family dynamics of the beneficiaries. Transferring the real estate in the Will, establishing trusts, disposing of assets before death and planning lifetime gifts could all be better estate planning approaches for many families.