Asset Management - Joint Tenants

October 9, 2007 by Dan White.

Joint TenantsHome ownership Asset ManagementClarity is critical when holding joint propertyThere is some recent Supreme Court of Canada court rulings which change tax implications for Canadians.People often ask about holding investment accounts or property jointly with an adult child. There are valid reasons to pursue this path, along with some pitfalls to consider.A popular estate-planning strategy is for a parent to register an asset, such as an investment account or family cottage, in joint names with adult children.Joint ownership is generally set up for two reasons: to avoid probate fees — since such an asset passes by right of survivorship to the surviving joint owner and therefore does not form part of the estate of the deceased; or for convenience, so the child can help the parent with management of the parent’s assets.While joint ownership allows parents to accomplish both of these objectives, these arrangements can have some complications. If not properly set up, putting a family home, investment accounts or other assets into a joint name with an adult child can result in complications upon death of one party.There are risks in putting a family home in joint ownership with a child and is not is not a step to be taken lightly.The Supreme Court of Canada reviewed and clarified the law regarding joint assets on May 3^rd 2007. Canadians now have to be aware that assets held jointly between parent and children will not automatically become the child’s assets when the parent dies.Joint ownership usually includes the right of the survivor of the joint owners to receive legal and beneficial title to the entire asset when the other owner dies. However, in law, there is a distinction between being the person who has legal title being the registered owner and the person who the beneficial owner being the one who has the use and enjoyment of the asset.A registered owner may not always have the right to the use and enjoyment of the asset. Instead, they may be in fact just holding the asset for the original owner’s estate. This is often the case when a parent sets up joint ownership of an asset with an adult child. This can be a good strategy when considering more than one child in your estate planning.Historically, courts would usually rely on the legal presumption that the intention of an individual who jointly owned an asset, such as an investment account or vacation property with their adult child was for that asset to pass, by right of survivorship, upon his or her death directly to that child.As a result, the asset would not form part of the estate of the deceased parent and would thus not be subject to probate fees.However, in light of two recent Supreme Court of Canada rulings, unless there is evidence to the contrary, it is now presumed, at least in the case of assets held in joint ownership by a parent and adult child, that the asset is being held by the surviving joint owner in trust for the parent’s estate.As a result, it is important for Canadians to clearly document their intentions whenever they own assets jointly with an adult child. If the intention as to what is supposed to happen to the asset when the original owner dies is not clear, the asset will likely pass to the original owner’s estate to be distributed in accordance with his or her will.Without the clearly stated intention of the original owner, many joint ownership situations have the strong possibility to end up in a lawsuit. The best documentation of intention is a separate written record of intention. Having such a document will also help to avoid potential legal disputes and costly court battles.We recommend in general that people should create a “letter of wishes.” This is a document that can endure separately from a will and deal with matters not covered in a will.The letter of wishes should clearly state exactly what you wish to happen in the event of your death. It should be dated and witnesses and to be done in much the same way as a will. The letter of wishes can be a supporting document to the will.You can also do a Deed of Gift evidencing you intention that upon your death, the joint asset is to go directly the child — there are other advantages and disadvantages Canadians need to be aware of.The advantage of having a letter of wishes is that; No probate fees will be payable with respect to that asset on death. The assets will be removed from the scope of the will. The transfer is easier and the survivor will not experience any delay in receiving the asset on death.The disadvantages are; Potential for loss of control over the asset by the parent. There is a potential to trigger immediate tax consequences such as capital gains or property transfer taxes. There is a potential for future tax consequences to child.  Such as in the case of the asset being a principal residence and the child already has his or her own principal residence, the capital gain exemption may be eroded. There is the risk of assets having claims made against the joint owner from creditors, or even spouses on marriage breakdown.

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