Estates & Wills & Trusts

Financial partnership with your child comes with risks

By Tony Poland, Associate Editor

Entering into a joint real estate title with your child or making them co-owner of your bank account comes with risks, writes Toronto real estate and wills and estates lawyer Lisa Laredo in The Lawyer’s Daily.

If the parent transfers half interest of their principal residence to a child residing somewhere else, they will immediately lose full control of the property, says Laredo, principal of Laredo Law.

The home is now also open to claims by the child's creditors, and if it's sold before or after the parent’s death, the co-owner's portion may be subject to capital gains tax upon any increase in value since its acquisition, she points out.

Laredo writes that if family members have a falling out, the child can't be removed from the title. The co-owner can also move to have the property sold, even though the chances of obtaining such an order are remote.

A parent might want to make an argument that the transfer was only for the purpose of avoiding estate administration tax and was never intended as a gift, she says.

“Such an argument would be hard to make since it would be founded upon a sham transaction merely intended to evade the payment of estate administration tax upon death of the parent,” Laredo notes.

She writes that a parent will sometimes add the name of a son or daughter to their bank account with the intent of helping to do such things as pay bills. Another reason would be to make the child the co-owner of the funds and a future beneficiary.

In such cases where the intent of the account holder is to gain the assistance of a child in administering the funds, “the principle of a resulting trust applies, and the funds remain those of the original account holder,” Laredo writes.

“Upon the death of said original account holder, the funds form part of her estate and pass in accordance with her will or upon an intestacy,” she states in the article. “Any action by the child to direct funds to herself during the life of the parent is, in effect, theft. Upon death of the original account holder, such action is a fraud upon the estate.”

Laredo says it is better to give the child a power of attorney to do banking rather than have the child as a co-owner.

“A power of attorney does not guarantee against fraud but allows easier proof of the fraud,” she notes.

If it’s the parent’s intention to benefit the child by adding them to the bank account, the presumption of a resulting trust can be rebutted, Laredo writes.

“Upon the death of the original owner, all of the funds legitimately flow to the child directly and do not flow through the estate of the deceased,” she says.

When dealing with bank accounts upon death, it may be difficult to know the intent of the parent, Laredo says. Except for the usual account agreement with the financial institution, there may be nothing to indicate the parent’s wishes.

“In such a case it is necessary to look at the account activity and try to ascertain the purpose for which the account was used,” she writes. “It may have frequent bill-paying activity, or it may have very little activity other than the accumulation of interest. The first instance indicates a resulting trust while the second case indicates an outright gift.”

In such cases, the administrator of the deceased parent’s estate would need to look at the account agreement for direction, Laredo writes.

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