Part 4 of a 4 part series: Joint Tenancy can be a very efficient Estate Planning Tool, but beware of its traps! Make sure you consult a Notary Public before making any decisions regarding Joint Tenancy.
Probate Fees
One of the common statements my clients stress to me is that they want to simplify their estate administration and minimize (or even avoid) the “unnecessary” probate fees. While joint tenancy can work very well by avoiding probate fees and expediting the estate administration process and, there can be some downfalls to using it solely for the purpose of avoiding probate fees.
Don’t get me wrong, Joint tenancy works great in a marriage or common law situation, but this changes when a child or some other person is added as a joint tenant. That’s where things can get a little dicey.
Capital Gain & Income Tax Burden
One of the traps of adding a child as a Joint Tenant is that it may trigger an income tax burden. The 50% interest in the property transferred to an adult child is deemed to have been sold at its fair market value and unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income as well. This could result in you having to pay the tax even though you didn’t receive a payment from the child.
Loss of Control
Another trap could be a loss of control of your property. In a joint tenancy situation when a spouse dies, the estate is left to the remaining spouse according to the Right of Survivorship rules. If a child is added on the title, that child assumes partial control of the estate (which is normally fine, as long as the child is trustworthy and won’t mistreat their parent). However, the child on title might use their position to abuse their parent and misuse the property. (The Community Response Networks or CRN’s across Canada report this is not an uncommon or unknown occurrence).
Power of Attorney
Another situation could involve Power of Attorney. Usually the parent is the one who grants Power of Attorney to a child. This is to ensure proper administration of the estate should the parent become incapable of acting in their own best interests. But what happens if the child added as a joint tenant becomes incompetent or starts acting irresponsibly? This could be due to an unfortunate accident causing a brain injury or the child might become addicted to drugs or some other impairment. What can the parent do if the child is misusing the property and/or placing the estate in jeopardy?
Exposure to Creditors
Additionally, your estate can be exposed to the creditors of those people with whom you share your property as joint tenants. For example, you can add your child as a Joint Tenant when their marriage is stable, but what happens if later they are going through an extremely acrimonious divorce? Ultimately, the divorce settlement could allow your soon to be ‘ex’ in-laws to be able to place a claim against your estate.
Resulting Trust
These being said, if you still decide to go ahead and add one of your adult children as a Joint Tenant, it is essential that your intentions are made “crystal-clear”. If you fail to properly document your intentions, it is very possible that by adding your child as a joint tenant, you are creating what is known as a ‘Resulting Trust’.
While both parent and child are registered on title as Joint Tenants, in the absence of evidence that the gift was intended, common law presumes that the joint tenant who has not contributed anything towards acquiring the share in the property is essentially just a trustee with no right to use the asset or benefit from its income. Once you pass away, your legal interests will pass to your child by the Right of Survivorship, but under a Resulting trust he or she must distribute the assets according to your will. (The legal “presumption of advancement” is the only exception, which applies where the gift is given to a minor or a disabled child.)
As you can see, your estate planning decisions can get very complicated. Instead of trying to apply some “home-made” solutions or “popular wisdom”, why not let a professional to “un-complicate” them? As a Notary Public, I can assess your family situation and your specific needs to ensure that your wishes are carried out by avoiding these traps. I’ve said it before, but it bears repeating: I’m not a product-seller but a problem-solver. So, allow me to provide you with customized solutions towards your estate planning decisions. You have nothing to lose, but your headaches…
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