Side-stepping probate can be dangerous

While there may be instances where joint ownership does make good sense, doing it simply to avoid probate is a fool’s game.

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Avoiding probate has become a national pastime in Canada. Everywhere you look there’s advice on how to ensure you pay the very least in probate fees when passing on your estate. Now, there’s nothing wrong with arranging your estate intelligently so that your beneficiaries get theirs. But some people will do anything to avoid parting with a cent. Too smart for their own good, these people are!

Take the idea of holding assets jointly. There are two ways to do this. The first option is to hold it jointly as “tenants in common,” in which case you each own exactly half, and when one dies, that person’s half would go to the estate. Option no. 2 is to own it jointly “with rights of survivorship.” This is the option people are seeking out in droves. With this option, you have simultaneous rights of ownership of the asset and upon death of one joint owner the interest in the asset automatically passes to the surviving joint owner(s). This works well for straightforward families where a hubby and wife hold everything jointly to simplify their estate. But the world’s changed a lot, and nuclear families are a rarity these days.

So what’s wrong with joint ownership? Well, it’s not the ownership, per se. It’s the implications involved in putting someone else’s name on your assets.

First, there’s the control you’ll give up. Since you’re no longer the only one with an interest in the asset, you don’t get to make all the decisions. That can be inconvenient. And it can cause a real conflict once you step off this mortal coil if you’ve named only one of your children jointly with rights of survivorship since the asset will pass directly and solely to that child, regardless of what your will says. Ditto if you’ve remarried and hold an asset using option no. 2 with your new spouse: upon your death, the asset will pass directly to your partner, leaving your children completely out of the mix. And since assets held jointly with rights of survivorship may form part of a creditor proceedings, if one of the owners becomes insolvent, the other could be affected.

Second, there’s the tax implication of adding an owner. If the Revenue Canada believes there has been a change in “beneficial ownership” when you execute option no. 2, then in the case of a non-registered investment portfolio, adding a child would be tantamount to selling half your portfolio to your kid. Even though no money changed hands, the tax man would be looking for his share of your capital gains. In the case of a home, the consequences are even more grave since the co-owner of the home may jeopardize his access to the principal residence exemption if he already owns a home. If he doesn’t, he’ll negate his ability to participate in the RRSP Home Buyer’s Plan.

In determining whether “beneficial ownership” has changed, Revenue Canada looks at such things as whether the account was initially set up jointly, there’s evidence that the transferor plans to gift the account to the transferee, both parties are using the income generated, and the transferee exercised any control over the account.

Some people go with joint title because they don’t know another option exits. Most people don’t realize that if you leave something to a person in trust through a will—or in the event that it is insurance proceeds, if you set up an insurance trust—you can establish a “testamentary trust.” That’s the legal term for a trust set up through your will, and it can be for the benefit of a partner or children, whomever you like. The great thing about a testamentary trust is that it’s perceived by Revenue Canada to be a separate entity. That means it enjoys a graduated tax rate similar to a living individual, sans the personal exemption amount. So by setting up a testamentary trust you have two streams of income that are being taxed all at the lowest marginal tax rate on their earnings.

Opting for the ease of joint ownership as opposed to doing a detailed estate plan may be cheaper in the short run, but often means you miss out on a long-term income-splitting opportunity. And it could cause aggravation even while you’re still alive. So while there may be instances where joint ownership does make good sense, doing it simply to avoid probate is a fool’s game.

7 comments on “Side-stepping probate can be dangerous

  1. I totally agree, and would add the comment that joint ownership has and will continue to lead to elder financial abuse, when unethical children are put on title of their parents' assets. I worked in the banking industry for 30 years and have seen several cases of this happening, resulting in an elder actually being put out of her home by the unscrupulous family member and a number of bank accounts being drained, leaving the elder with few resources.

    With a power of attorney arrangement, at least the owner can change their mind and revoke the POA if fraud is occurring, but joint ownership is not revokable. It is devastating for elderly people to discover their family is not honourable, and the fear they feel once they have been robbed is hard on their health. Unfortunately, the bank is often not able to protect these clients, despite having serious concerns. Every attempt is made to help the elder to be clear on the potential problems, but families can put so much pressure on their elders that they will give in to gain peace. I am not saying everyone is going to act dishonourably, but it does happen and this is the situation it will potentially arise.

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    • Sadly even POA isn’t perfect. Over time an elderly friend of my mother’s realized the person she gave a POA (non-family) to was systematically draining her accounts. Because her dementia has now reached a point where she isn’t considered capable of changing her will or POA she is stuck! I have reported this as elder abuse to the Public Guardian & Trustee and we are awaiting the results of their investigation.

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  2. Aftrer reading joint ownership and Option no. 2 to own it jointly “with rights of survivorship would testamentary trust will prove benefikcial to the testator?” Please clarify.

    ONC

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  3. Are there probate fees in Quebec?

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  4. My uncle just inherited property out of my grandparents estate and it was Joint rights of survivor ship will he have total control over the house?

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  5. The other option is to invest in insurance based products such as Insurance GICs also known as Accumulation Annuities or Seg Funds. These products are only available through insurance companies and avoid probate when a beneficiary has been named. For these products beneficiary designations is available in all provinces unlike bank issued GICs which does not allow beneficiary designations especially on non-registered funds.

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  6. My husband found out years after, his brother, some how convinced their mom to sign over ownership of her home. She was removed and he was added. He did not pay for the house, in fact the parents were generous and gave both sons money for their down payment. A couple of years after he took ownership of the house, he added his wife to the title. When the mom continued to suffer from dementia and was placed in a home, his brother sold the house. We know the mom was not given independent legal advice and the mom was not given any funds from the sale. The same son is also joint on her bank accounts. In 2016, the PA finally came into play and my husband was able to ask the bank for statements. After reviewing four years, he discovered money being transferred, by his brother to his brother’s own accounts and accounts he holds with his wife. The man on a couple of occasions deposited the mom’s pension cheque and transferred the amount or more to his joint account with his wife.
    Over the course of fours years viewed, my husband can prove his brother transferred to his accounts over $20,000. He also attempted to take another $15,000 but it was discovered and replaced. There are also numerous unexplained cash debits and interac transactions for LCBO and gas stations. Their mom does not drive or drink and the one LCBO debit took place when she was hospitalized, at the time touch and go.
    Other items that came to light and tips for people to look for, he had a T2201 completed and placed his name as the person who can claim the mom’s disability tax credits. This was done by having my husband sign a T1013 to have her income tax done, and under the representative (accountant), he had the accountant submit a T2201. The joint power of attorney was never informed and the accountant refused to give the joint PA any info, even though they knew he was the PA.
    EX: he sells the house, not his primary residence, is taxed heavily. He off sets his tax burden by claiming his mom’s tax credits, such as disability tax credit and medical expense tax credit.
    My husband only found out when the accountant sent him docs to sign (T1 adjustment) , removing tax credits from the mom to the brother for medical expense and was never told who was on the receiving end of the disability tax credit. We can only assume it was his wife,
    I also worked in a bank for over 30 years and started suspecting my brother in law about ten years ago, but my husband did not want to listen or see the signs. It was his brother after all. Now with paper based proof, he can see what was going on right under his nose.
    There are signs and family members are no exceptions.
    The father passed away in 1989, so we do not know how long this has been going on, with her accounts, as she added him not long after the dad died.
    A title search on the house indicates in 2005 he took ownership of her house and in 2013 added his wife. The mom lived there until 2015. We did wonder what would have happened to the mom, if the son had died between 2005 and 2015. We have a feeling she would have been left at the curb.

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