The Great Wave of Joint Ownership

Estate planners have been aggressively utilizing joint ownership as a method for minimizing probate fees for some time.  Recently, however, this practice has increased.  What you may be surprised to know is that, in some cases, there are negative and unintended implications.

An all too common scenario is where mama or papa have died and the surviving parent decides that he or she wants to avoid probate by adding his or her child or children to the ownership of the home as a joint tenant with right of survivorship.  While this arrangement will avoid probate fees, it results in the relinquishment of significant control over the home of the surviving parent.  The surviving parent now must rely upon the co-operation of his or her child or children to make substantive decisions pertaining to the home.

Another consideration often omitted is the tax implications inherent in the transfer of capital property (such as the home) to a child.  If the property being transferred is the principal residence, and the child does not reside in the residence, that child may incur a tax liability for one half of the capital gain of the residence for which the surviving parent would have otherwise been exempt.

Where property is transferred to a child, the surviving parent is deemed to have transferred one half of the interest to that child.  This transfer will be deemed to have occurred at the fair market value of the property transferred, even if the property was gifted to the child.  If the property is not the principal residence of the surviving parent, then the surviving parent will have to declare a capital gain where the property has increased in value.

Parents should be very cautious in the transfer of capital property to a child, especially if it is not a principal residence.  For instance, if the property being transferred are stocks, the parent will have to declare a capital gain on any increase in the value of the stocks, which in some cases can be substantial.  But just as the value of stocks can go up, so too can they go down.  If a parent transfers stocks to a child that have had significant capital gains, and then subsequent to the transfer the stock value goes down substantially, the parent will have to pay capital gains tax, even though the value has decreased substantially.  In such circumstances, the parent may have a significant burden in trying to fund the payment of the capital gain tax.

Another common usage of joint ownership is the transfer of bank accounts from a parent to him or herself and to the child jointly.  The inherent problem of loss of control again presents itself as an issue.  Other questions usually left unanswered are:  “What is to happen to the money in the account upon the death of the parent?”  “If other children or beneficiaries exist, are those beneficiaries to share in the account or is it to go strictly to the child named as a joint tenant?”  Some of these questions may be answered by knowing what the intention of the parent was.  However, the lack of clarity can lead to disputes and litigation, of which the legal profession is witnessing more and more.

Deciding whether joint ownership is a vehicle of estate planning that you should be using can have some hidden consequences.  Before you surf the great wave of joint ownership be sure that you understand what those consequences are so as to avoid a potentially damaging plunge.


© Copyright Boddy Ryerson LLP 2011. All rights reserved.