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Use of Joint Ownership in Estate Planning

Use of Joint Ownership in Estate Planning


Joint ownership is regularly used as an estate planning tool, because on your death, joint property transfers to the surviving joint owner automatically on your death with little or no delay, effort and expense. A capital asset, such as land, a bank account or an investment account, can be owned jointly with another person. Typically spouses or parents and children use joint accounts to enable the other joint owner to the account to pay bills if one of the owners becomes incapable of taking care of finances. Joint ownership is also used to reduce or avoid estate complications, probate fees or estate administration.

How Does Joint Ownership Work

All joint owners own the jointly held property together while alive. On the death of one joint owner, the surviving joint owner automatically receives the deceased’s interest in the joint property through rights of survivorship. Unless something goes wrong, the joint property cannot be owned by a deceased joint owner and it does not become part of the deceased owner’s personal estate. That means the joint property is not distributed according to a deceased person’s Will and it is not included in the value of the deceased person’s which is how probate fees are calculated.

Probate Fees

The probate process is a court application seeking a probate order from the Supreme Court of B.C. which confirms the legality of your Will, officially recognizes the appointment of the executor or executrix appointed in the Will as the person legally responsible to administer your estate, and requires the executor to administer your estate and to distribute it as specified in your Will. It also provides a format under which the estate administration and distribution can occur. The executor’s decision making, estate’s finances (including executor’s fees) can be reviewed and approved by the Court. Probate is required if there is a dispute regarding the legality of your Will, if there is a dispute or legal issue between your executor and the beneficiaries of your estate, if there is a dispute among or between your beneficiaries regarding the estate. Probate is also required if your estate includes property or assets that your executor cannot transfer or sell without a probate order, such as land, a significant bank or investment account or a valuable motor vehicle.

The probate fee is essentially a filing fee (or estate tax) paid to the provincial government in exchange for receiving a probate order from the Supreme Court of B.C. In B.C., probate fees based on the total fair market value of an estate (i.e. without deduction for debt) as follows:

Gross Value of Estate: Probate Fee:
$0.00 – $10,000.00: $0.00 (nil)
$10,000.00 – $25,000.00: $208.00 (flat fee)
$25,000.00 – $50,000.00 $6.00 per $1,000.00 *over and above the flat fee
Over $50,000.00: $14.00 per $1,000.00 *over and above the previous fee

*the amount will be rounded up to the next $1,000.00.

For example, if the gross fair market value of your estate is $837,431.00 (debts are not taken into consideration to reduce estate value for probate purposes), the probate fee for your estate will be as follows:

$0.00 – $10,000.00: $0.00 (nil)
$10,000.01 – $25,000.00: $208.00 (flat fee)
$25,000.01 – $50,000.00 $150.00 (25 x $6)
Over $50,000.01: $10,332.00 (738 x $14.00)

If your executor needs to engage the services of an estate lawyer to make the probate application, then legal expenses will also be incurred to administer your estate. Legal fees will vary depending on the complexity of the estate and its distribution, and more importantly, the degree of cooperation between all the people interested in your estate. If there is a legal battle over your estate, then the legal costs will be substantial. Often avoiding the possibility of contentious estate litigation is much more important that avoiding probate fees.

If most of your net worth is in your home and it is held jointly with your spouse or partner, then no probate fee is payable on your estate to deal with the property when you die. If a surviving spouse or partner is entitled to receive your home under your Will, but you are the only owner of it, your estate will need a probate order to transfer the home to your spouse and a probate fee will have to be paid on its full fair market value without deduction for any mortgage registered against it.

For substantial estates, it can be very worthwhile (for your beneficiaries at least) to avoid the probate process and probate fees. You can budget roughly $18,000.00 to $20,000.00 for probate and legal fees per $1 million of estate value going through an uncontested probate and estate administration process. Additionally, for potentially contentious estates, avoiding probate (as you can do using joint ownership) can help ensure your surviving joint owners receiving the property after your death avoid the prospect of expensive estate litigation.

Tax Considerations

As already mentioned, converting a solely owned property to joint ownership status with rights of survivorship can lead to unexpected tax consequences under the Income Tax Act (Canada, administered by Canada Revenue Agency). Transferring a joint interest in a capital asset, such as real estate, or an investment account is a disposition by the original owner at its fair market value at the time of transfer. If the present market value of the transferred property exceeds its adjusted cost base (the tax cost of the property to the original owner), the difference or the capital gain will be taxable and one-half of that capital gain on the portion transferred to the joint owner will be included in the owner’s income for the year of disposition. Similarly, any capital loss experienced should be reported to CRA.

When an owner transfers a joint interest in property to his or her spouse, the spousal rollover under the Income Tax Act allows such transfers to be reported at the original adjusted cost base of the transferred property, instead of present fair market value, thereby avoiding a taxable capital gain. Appropriate elections and filings have to be made with CRA to document the transaction. This rollover is not available on transfers to children.

If you choose to transfer a joint interest in your residence to a child to avoid probate fees on your passing or to ensure the child of your choice receives the asset when you die, your own principal residence exemption will shield you from any capital gain tax on the disposition should you choose to report it to CRA on your tax return as you ought to do, but your child will not have the benefit of the principle residence exemption on a future disposition unless the child also lives in your home.

There are also legal expenses involved on a transfer a joint interest in real estate to someone, and if you transfer a joint interest in a home you live in, or in a recreational property, or in a family farm to someone other than a related individual (as defined under the Property Transfer Tax Act (B.C.) property transfer tax is also payable on the fair market value of the interest transferred (1% of the first $100,000.00 and 2% of the balance).

With regular bank accounts, triggering a capital gain or loss is not a concern, but together with any other income earning asset, like rental real estate or an investment account, the new joint owner should declare income earned from property on their own tax return.

Misapplied Joint Ownership

If you just want a new joint owner be able to access a bank account to help you manage your money and pay your bills, with the understanding that upon your death the joint owner is to distribute the bank balance according to your wishes (or your Will as the case may be), then you have not transferred a true legal and beneficial joint interest in the property with the intention that upon your death, the surviving joint owner receives the property as the surviving joint owner. The obligation imposed on the surviving joint owner to distribute the property is inconsistent with the right of survivorship. Joint assets in those circumstances are technically still beneficially owned by you as owner and form part of your estate on your passing. If you want or need help managing your finances, then consider using other incapacity planning tools, like a power of attorney.

Some people attempt to avoid undesired tax consequences of a transfer of a joint interest to someone, by utilizing a bare trust agreement under which the new owner renounces any claim to beneficial ownership or entitlement to the jointly held property, agreeing to hold it as joint owner in name only in trust for the original owner. The Income Tax Act provides there is no deemed disposition if legal ownership changes without changing beneficial ownership which is preserved by using a bare trust agreement. This strategy, however, torpedoes the effective use of joint ownership for estate planning purposes, because the trust agreement proves there was no intention by you as the original owner to transfer joint ownership with survivorship rights to the other joint owner.

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Risks: Loss of Ownership and Control

There are risks of undesired consequences if you transfer a joint interest in your property to someone else aside from undesired tax consequences. This risk is usually of greater concern when the new joint owner is someone other than a spouse who you get along with. Some of these risk factors include the following:

  1. Any interest in a jointly held property can be encumbered, and possibly seized and/or sold by a creditor(s) of any joint owner or by his or her Trustee in Bankruptcy if a joint owner becomes bankrupt. A trust agreement proving the other joint owner was really just holding it for you all along will certainly help here, but a trust agreement like this will negate the automatic survivorship rights.
  2. Joint property may be divided upon the breakdown of your relationship with the other joint owner.
  3. With Land, joint ownership can also be severed or terminated by any joint owner without notice to the other joint owner. A joint owner can sign and register a transfer of a joint interest to himself or herself, converting the joint property into a tenancy in common which means upon an owner’s death his or her interest in the property remains in their estate, as does yours.
  4. Once you transfer a joint ownership interest to someone, you no longer own the asset by yourself. The other joint owner has access to it and can further transfer or encumber it or dispose of the property without notice to you and without your consent. This risk is probably greater with a liquid asset like a savings or investment account but also exists with land.
  5. If you later discover that you need to sell the interest in the property you transferred to pay for your living expenses, you may not be able to get it back.
  6. If you intend your surviving joint owner to receive, and then sell or transfer or distribute the asset in any particular way after your death (ignoring the fact this may actually negate the intention to transfer a joint interest in the asset), there is always a risk that upon your death, your surviving joint owner will break a promise to you and just keep it all. You then force your intended “beneficiaries” to either take legal proceedings to retrieve what you wanted and intended them to get or just let it go. Without cogent proof or evidence of the obligation of the other joint owner to distribute the property after your death, the beneficiaries may not be able to prove their claim to the property, even after spending money on lawyers when they try to do so.
  7. After transferring a joint interest in certain types of property, like land, you will be unable to make decisions relating to that property without involving the other joint owner. For example, if you make your child a joint owner of the land for estate planning purposes, you will not be able to mortgage it, refinance it, or sell it, without your child’s cooperation and consent (as they will have to sign legal documents to do this and they may decide not to for various reasons). You could attempt to minimize this problem by having your joint owner give you a power of attorney; however, any power of attorney can later be revoked or canceled on written notice to you.
  8. What happens if the other owner dies before you? Be sure your estate planning goals and objectives are not upset by the scenario where you survive the other joint owner.

Review and Balance Your Objectives

Joint ownership can be useful for incapacity and estate planning purposes provided your planning objectives are such that joint ownership is the best solution for you. The factors you should consider and the risks involved are likely more complex than may have appreciated. It is important for you to seek the advice of a lawyer experienced with estate and incapacity planning to assess your situation and to help you find the estate planning solution best suited to you. All relevant implications and risk factors inherent in transferring a joint interest in your property to someone else should be understood, recognized and assessed by you before you transfer property. It is usually far easier and less expensive to plan ahead than to attempt to unwind a bad or unanticipated situation, which may no longer be possible.

There are some circumstances when transferring joint ownership to someone else can make good sense; however more often than not, the unrecognized or unanticipated negative aspects or risk factors of doing so can or should be minimal and not outweigh the benefits. Remember to keep your goals in perspective because avoiding probate fees and legal fees may not be your most significant estate planning obstacle. For example, avoiding triggering a taxable capital gain should usually outweigh the desire to avoid probate fees. The top tax rate on capital gains can be as much as 22% on the capital gain, while the top probate fee is only 1.4 % (plus the cost of a lawyer to assist going through the probate process if you require that assistance). Also a capital disposition under the Income Tax Act is a matter that you will have to deal with while you are alive, whereas leaving the asset alone and leaving your estate to incur probate fee to deal with it will help you avoid all the risks of joint ownership and keep you fully in control of your property while you are capable of dealing with it. Remember that probate expenses will not affect you or your lifestyle in any way.

There are other estate planning strategies and tools which can be used to avoid probate fees. Examples include gifting property while alive, placing property in a trust (alter-ego trust, joint spousal or joint partner trust, or family trust), transferring property into a company you control and using dual wills (a probate Will to distribute assets requiring probate and a non-probate Will for everything else). There are unique advantages and disadvantages to each strategy. The theme that runs through them is that your estate avoids probate because you have taken steps to ensure you do not personally own the property when you die, or the property is owned and controlled in a manner which does not require a probate order to deal with it after you die. If you have any further questions about joint ownership, please contact us.

This article is written by Roy Sommerey, a partner of Doak Shirreff LLP, whose practice includes estate planning, incapacity planning, and tax planning, and helping deal with incapacity and estates.

The opinions set out in this article reflect generally on this area of law and do not constitute legal advice for your situation. The information contained in this article should not be relied on for assessing anyone’s specific legal position. Contact us for legal advice regarding your specific situation before you make any decisions or take any steps.