The dangers of joint ownership of the family cottage
By AdvocateDaily.com Staff
In the final instalment of a four-part series on transferring ownership of the family cottage, Winnipeg wills and estates lawyer Cynthia Hiebert-Simkin discusses the potential pitfalls of joint ownership.
Parents should think twice before putting the family cottage or other large assets in joint ownership with children, says Winnipeg wills and estates lawyer Cynthia Hiebert-Simkin.
Hiebert-Simkin, partner with Tradition Law LLP Estates and Trusts, says joint ownership is a standard estate-planning tool for those who are married or in common-law relationships and want assets to pass to their spouse via right of survivorship when they die via right of survivorship.
But the technique becomes problematic when extended to anyone other than a spouse, she tells AdvocateDaily.com.
“I know of a few situations where joint ownership with a child works out well without any kind of fight,” Hiebert-Simkin says. “Maybe it’s appropriate, but you have to look at the overall estate plan to determine if that’s true.”
Typically, the aim of such arrangements is to transfer funds to beneficiaries while avoiding the probate fees, usually due on assets that pass through a deceased person’s estate, she explains. That makes joint ownership particularly appealing in provinces with relatively high estate administration taxes, such as Ontario and British Columbia.
In other cases, it’s done to allow children to more easily help parents with their finances should they become incapable, but Hiebert-Simkin says that aim can be achieved with a well-drafted power of attorney.
She fears many testators make the decision to add children or other third parties as owners of real property or bank accounts without obtaining legal and accounting advice to ensure it makes sense for them.
“If you go into a bank to add someone, you’re not going to get any advice about the legal effect it will have on your estate plan,” Hiebert-Simkin says. “Parents go in with good intentions thinking they are making life easier, but that might not be the case.”
She says one of the problems that can arise on the death of a parent is when other children of the deceased object to their sibling taking ownership of the account by way of survivorship.
A landmark Supreme Court of Canada decision from 2007 held that a presumption of a resulting trust applies over assets transferred by way of joint accounts between a deceased parent and an adult child when evidence is lacking as to intentions.
“As you can imagine, there are a lot of fights about what the parent intended, and a body of case law has emerged about how to prove intention and the burden that has to be met,” Hiebert-Simkin says. “It gets very complicated, and with that added complexity comes added expense. While you may have avoided probate fees, you now have even bigger litigation costs.”
In addition, she warns that parents may also lose control over an asset moved into joint ownership.
“Just because the parent’s name is on the bank account or parcel of land, doesn’t mean you can do whatever you want with it after you’ve added a new owner,” Hiebert-Simkin explains. “You might like to think that your child knows they’ve only been added to help out mom and dad, but things happen, and misuse can occur.”
Children added as joint owners are within their rights to drain bank accounts, she notes, and would also have a strong case should they want to block a parent’s planned sale of an asset.
For example, in 2009, Manitoba’s Court of Appeal ruled in favour of a child added by his mother as a joint owner of her house in the early 1990s. Following a falling out between them, the mother attempted to take back the gift, but the court held it was too late for her to change her mind. In the end, the property was sold over the objections of the son, but he received half of the proceeds.
Hiebert-Simkin says parents also frequently fail to consider the tax consequences of joint ownership. While tax due on income derived from assets is sometimes an issue, she says capital gains tax is a more common problem.
Parents who transfer a percentage of their home to a child will lose their principal residence exemption on that portion, while the child who owns their own home will owe capital gains tax on the fair market value of their share.
“Depending on when the transfer occurred and the strength of the market, those personal capital gains liabilities might be higher than the probate fees that would have been due on the estate,” Hiebert-Simkin says.
Parents may also be exposing themselves to unexpected liabilities by adding a joint owner to the property since these assets can then be chased by that person’s creditors.
In one recent case, a Manitoba mother added her daughter to the title on a piece of land before the child declared bankruptcy. Although the mother never informed her daughter of the change, the trustee in bankruptcy discovered the asset during a property search and pursued the property for the satisfaction of the daughter’s creditors.
“The mother lost in court when the judge found that she had intended to make the gift, and couldn’t undo it because of repercussions she didn’t anticipate,” Hiebert-Simkin says, adding the case should be enough to convince testators of the need to seek legal counsel before leaping into joint ownership.
“Know what the law is in your jurisdiction, talk about the tax consequences, and make sure your intentions are well documented,” she says.
To read part one, why communication is so vital, click here.
To read part two, the cost of a cottage estate plan, click here.
To read part three, how changes in life circumstances should affect a cottage estate plan, click here.