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Estates & Wills & Trusts

Joint ownership to reduce probate fee can prove problematic

Although the estate administration tax has some lawyers and their clients focusing on probate fee reduction strategies including the transfer of assets to a joint owner, this can have negative results, Toronto wills and estates lawyer Mary Wahbi writes in The Lawyers Weekly.

As Wahbi, partner with Fogler Rubonoff LLP, explains, probate of a deceased’s will isn’t mandatory, but is often required by financial institutions and government agencies as judicial confirmation that the will is valid and that the executor is authorized to act in the estate.

“When a will is submitted to the court for probate, estate administration tax (the probate fee) is charged in Ontario at approximately 1.5 per cent of the gross value of the estate,” she writes.

As a result, some estate planning lawyers and clients seek to implement probate fee reduction strategies, “including the transfer of assets such as a home, cottage, bank account or investment account to a joint owner so that the asset passes automatically to the surviving joint owner outside the will and is not subject to probate fees,” says Wahbi.

And although this is popular, she says, it can be problematic and could lead to negative consequences. For example, the transfer may not actually save on probate fees.

“In a transfer from a parent to an adult child, the presumption is that the child holds title on a resulting trust. The child must prove the intention of the deceased joint owner was to make a gift (see Pecore v. Pecore 2007 SCC 17 and Madsen Estate v. Saylor 2007 SCC 18). There is a need in such a case to include evidence of a clear intention to transfer the beneficial interest in the asset, best provided by way of a written declaration of such intention," writes Wahbi.

This type of strategy can also have adverse income tax consequences, she says.

“The transfer of an asset with accrued gains to someone other than the owner’s spouse is a deemed disposition at fair market value which will trigger tax on any accrued capital gains on the half gifted by the transfer. The transfer of a home into joint ownership with an adult child by a parent will result in the loss of the full capital gains exemption on the home’s future gain in value, turning a 100 per cent tax-free gain into a partially taxable gain on the half that is gifted to the child. After the transfer of an income-producing asset, the joint owner will have to file tax returns claiming his share of the income earned and pay tax at his marginal rates, which may be higher than the parent’s,” writes Wahbi.

There may also be a loss of control of the property, as the original owner will no longer be the only person with control, she says, and the property can’t be sold or transferred back to the original owner without the joint owner’s consent.

In addition, writes Wahbi, there may be a skewing of the estate plan and a change in the treatment of the property for family law purposes.

“If the original owner is a spouse and transfers the matrimonial home to his spouse as joint tenants, on a subsequent separation of the parties, the original owner does not get the benefit of the exclusive growth after the date of separation in the value of the property because it is now owned by both parties,” she explains.

Finally, there could be unanticipated claims. For example, if a half-ownership of an asset is transferred to an adult child who later separates from their spouse, the ex-spouse could have a claim on their partner's half of the asset, particularly if the asset is a matrimonial home, says Wahbi.

Also, if the joint owner has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by their creditors, she explains.

Ultimately, Wahbi writes, there are a number of other probate savings strategies available, including alter ego trusts, joint partner trusts, bare trustee arrangements, and dual wills that may better achieve probate fee savings without the adverse consequences of transferring assets into joint ownership.

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