Often, for estate planning or other purposes, a person will transfer an asset that he or she owns, into joint ownership with someone else. But the intention behind the asset transfer is unclear. And whether the transfer is, considering all the circumstances, a good idea is even less clear.
Unless the intention is properly documented, disagreements and litigation among family members result sometimes before, but certainly on the death of the person who transferred the asset.
As well, the transfer of an asset, or an interest in ownership of an asset, even as a gift, may trigger tax or have other consequences which the person transferring the asset has not considered.
Not only is it critically important to record the person’s intention in transferring the asset, but also it is even more important to get tax advice from a qualified tax advisor before transferring the asset. People are often surprised that a gift, where no value is given to the person making the gift, is a “disposition” for tax purposes and triggers tax. You never want that to come as a surprise. So check it out ahead of time. And at the same time, consider whether the transfer is a wise, or the optimum, way to achieve the person’s intention.
Before discussing documentation of intention, an explanation of the two most common forms of co-ownership is warranted. They are tenancy-in-common, and joint tenancy.
Tenancy-in-common results when A transfers a part-ownership interest in an asset to B, with equal or inequal shares. If A transfers a 30% interest in an asset to B, A and B are tenants-in-common. If A dies, A’s interest in the asset forms part of A's estate, and passes by A's will or, if there is no will, on intestacy to be divided according to the distribution scheme of the Wills, Estates and Succession Act.
Joint tenancy results when A transfers the asset to A and B as joint tenants. For a land transfer, the words “as joint tenants” must be used; for other assets, the words themselves aren't needed but A and B must acquire their interests at the same time and the interests must be equal, they cannot be unequal. If A transfers to A, B, and C, then each of A, B, and C own a 1/3 interest in the asset. The joint tenant owners all have an equal right to possess and enjoy the asset.
A key attribute of joint tenancy is the "right of survivorship" in which the ownership of the assets transfers in the instant of death of a joint tenant, to the surviving joint tenant(s). The asset does not form part of the deceased joint tenant's estate. This can be a particularly important attribute of joint tenancy for estate planning, avoiding the need for probate, or avoiding challenges to arrangements made through a will. (Probate is a process to have the deceased person's will recognized and the appointment of executor confirmed. As in BC it triggers probate fees, a number of perfectly legitimate strategies have developed to avoid having to probate a will. )
There are a number of reasons why someone might want to put an asset into joint tenancy with a co-owner. One common situation is when an asset owner wants the co-owner's help to manage the asset owner's affairs. A grandmother might put a child's name onto a bank account or an investment account, so that the child can help the grandmother with her finances.
But in that situation, what is grandmother's intention? There are at least three different scenarios:
The problem is that, without clear evidence of grandmother's intention, family arguments are likely both during and after grandmother's death, about who can use grandmother's money during her lifetime and for what purposes; and who is to own the account after grandmother's death.
Court cases – of which there are many - can look at evidence like grandmother's discussion with a banker or investment advisor when she put the account into joint ownership, or other personal or document evidence indicating grandmother's intention.
Ideally, however, grandmother will have arranged for clear documentation about her intentions.
In case of Scenario 1, where the child's name is put onto the account for convenience only, if grandmother has child sign a "bare trust declaration" or "declaration of nominee ownership", that document will make it clear that the account remains grandmother's sole property during her lifetime and after her death, so that the account becomes part of her estate and passes by will, even though the account may be transferred into the name of the child. With this arrangement, the child holds the account in trust for grandmother and then grandmother's estate. The child has no ownership interest in the account.
In the case of Scenario 2, where grandmother wants to include child in ownership immediately and wants the account to become the child's after grandmother's death, grandmother should be signing a "deed of gift" to evidence the fact that she is making a current gift of the interest in the account, so that child has an ownership interest from the time that child's name goes on the account, and the child is entitled to full ownership of the account on grandmother's death.
In the case of Scenario 3, where grandmother wants the full benefit of the account to remain hers during her lifetime but wants child to own the account after grandmother's death, grandmother should sign a "deed of gift of survivorship interest" which records the fact that the child is included in ownership of the account but that the account is solely grandmother's during her life; however on her death, the child is entitled to full ownership of the account.
I want to address an unfortunately common probate and probate fee avoidance strategy, sometimes counselled by banks or financial planners for elders, which is, "just put all your assets in joint tenancy with your kids".
I don't know why people are so concerned about probate fees, which in British Columbia are 1.4% of the value of the estate over $50,000. While doubtless annoying, and on larger estates can be a significant amount of money, a decision about probate fee avoidance should always be considered in the context of the person's overall asset position and wishes for estate distribution.
But all too often, a parent, who wants to avoid probate and probate fees on the parent's death, transfers title to the parent's home to include one or more children, none of whom live with the parent. Without a declaration of trust showing that the children do not have a true ownership interest in the home, the parent has with the stroke of a pen, limited the parent's principal residence capital gain exemption to shield only the future capital gain on the parent's share of ownership, while the future capital gain on the value of the house which is owned by children will be taxable! A bad outcome.
And what if the parent wants to sell the home to fund unexpected care requirements? The children are co-owners – while in some families the children would agree to the sale, sign the transfer to a buyer and give the money to the parent to fund the parent's care, my experience is that not all families can be relied on to act in that way. So the parent, in an attempt to avoid a 1.4% tax, may have foregone the ability to provide needed care for himself or herself. A really, really bad outcome.
My own rule about transferring title to assets is that the five horsemen of the apocalypse must be considered, ideally by a tax specialist – income tax (which includes capital gain tax), GST, PST, Property Transfer Tax, and probate fees. Before you transfer title to an asset, sit down with your accountant/tax advisor and discuss which taxes may be applicable, what the tax implications will be, and how to document your intention. Your lawyer may also be needed to evidence your intention.
Family disputes over what is intended by the parent's or grandparent's transfer of ownership of an asset are not only incredibly expensive but more important, can destroy family relations for decades – or the rest of the family members' lives.
Check, check, check. Document, document, document.