Using a joint account as part of an estate planning strategy is a popular practice among Canadians.
An aging parent may place his or her assets into an account that’s shared with an adult child. When the parent dies, according to the strategy, the assets become the property of the child, and thus will avoid the probate process and probate fees. Holding a joint account with a spouse or another person offers the same benefit.
But while holding assets jointly can be beneficial in certain situations, doing so is not always advisable. If the strategy is not documented properly, for example, the practice can result in unintended and undesirable consequences.
Christine Van Cauwenberghe, vice president, tax and estate planning, with Investors Group Inc. in Winnipeg, says she doesn’t recommend the use of joint accounts in estate planning and suggests that clients should exercise caution before adding joint owners to their assets.
The key is to make sure your clients understand the true intent for using a joint account.
“The predominant reason why clients use joint accounts is to avoid paying probate fees,” says Keith Masterman, vice president, tax, retirement and estate planning, with CI Investments Inc. in Toronto.
Masterman asks: “Is it worthwhile to hold assets jointly just to avoid paying the probate fees, which are not significant?”
Probate fees, which vary by province, can be considerably lower than other forms of taxation. The highest probate fees, for example, are levied in Ontario (where the probate fee is known as the “estate administration tax”). That province charges 0.5% on the estate’s first $50,000 and 1.5% on the value of the estate in excess of $50.000. In British Columbia, the tax is 0.6% on the portion of the estate valued between $25,000 and $50,000, and 1.4% on the amount in excess of $50,000.
“In Ontario, that’s a one-time fee of less than $1,500 on an estate valued at $100,000, or less than $15,000 on an estate valued at $1 million,” Masterman says.
Beyond the fees associated with probate, some clients may use joint accounts as a way of avoiding the probate process, which can be lengthy and costly, altogether, says Heather Holjevac, senior wealth advisor with TriDelta Financial Partners Inc. in Oakville, Ont.
Spouses commonly hold joint accounts in the form of joint bank and investment accounts, as well as holding real estate as joint tenants. Under joint tenancy, the assets automatically become the property of the surviving spouse upon the death of one spouse.
The Income Tax Act allows for assets to be transferred to the surviving spouse on a tax- deferred basis and this does not necessarily require any prior estate planning. (This tax-free rollover also applies to RRSPs and RRIFs for which the accountholder’s spouse is named as a beneficiary.)
In another common joint- account strategy, as mentioned above, a parent holds a non-registered financial asset, such as a bank account, jointly with an adult child.
Easy access to cash
“Such accounts facilitate easy access to cash if the parent were to die and cash is required to pay expenses,” Masterman says. “If the account was held only in the parent’s name, accessing the funds could be difficult.”
Adds Holjevac: “Joint accounts also can make it easier for the child to manage day-to-day expenses for the parent if the account requires only the signature of the child to execute a transaction versus the signatures of both the parent and child.”
Van Cauwenberghe recommends using a power of attorney (POA) designation instead of a joint account for handling daily expenses.
“Some parents, for example, might think an [adult child acting as] joint owner will make maintaining their assets easier in the event that they’re no longer capable of doing so,” Holjevac says. “But that’s exactly what the POA is supposed to achieve.”
In fact, Holjevac adds, POA documents can be designed to restrict the child to act only in certain circumstances, such as incapacity.
The addition of an adult child as a joint owner of an asset can have unintended consequences if the objective of joint ownership is not clearly established.
Although the joint account created by parent and adult child might have been established for convenience while the parent is alive, the child often assumes the right of survivorship when the parent dies – that is, the child will become the beneficial owner of the assets. That might be the plan, but also may contradict a separate estate plan.
“The danger is that making an account ‘joint’ could compromise the overall estate strategy set up in a will and override it,” Holjevac says. “If there is more than one child and the account is made ‘joint’ with only one child, then those assets could [go to that one child], as there is no obligation to include these assets in the overall estate transfer.”
This situation can lead to family disputes or spur legal action if other siblings believe they are entitled to a share of the assets in the joint account.
There have been several court cases in which the right of survivorship of assets by a joint accountholder has been challenged by other siblings, says Van Cauwenberghe.
Two cases decided by the Supreme Court of Canada a decade ago – Pecore v. Pecore and Madsen Estate v. Saylor – demonstrate that various circumstances may be at play in determining whether assets held in a joint account revert to the deceased parent’s estate or to the joint accountholder child upon the parent’s death. The right of survivorship attached to many joint accounts is not ironclad and can sometimes be challenged.
These court cases, while complex, raise doubts about the commonly held belief that the adult child would enjoy the right of survivorship and become the beneficial owner of the assets.
Given the prospect of costly litigation, Van Cauwenberghe says, setting up joint accounts “begs the question as to why the client is doing it in the first place.”
To make the right of survivorship stick, Masterman says, the key question is: “What is the intent of setting up a joint account?” Did the parent intend to give the assets in the joint account to the adult child? If that is the case, Masterman says, put it in writing.
“You must document the living daylights out of it,” he says. “And you must present sufficient evidence to support the contention that the deceased wanted the joint accountholder to get the assets upon death.”
To minimize disputes, Masterman suggests, your clients should communicate their intention clearly to their loved ones. “[Your clients] must know their beneficiaries well and recognize that they might have different personalities [regarding money].”
Draining the account
Whatever the intention behind setting up the joint account, there is another risk: all the assets in the account can become exposed to the adult child’s vulnerabilities.
For example, Holjevac says, an irresponsible child could drain the account set up to help manage the parent’s personal care. Funds earmarked for the estate and other children could be squandered or distributed in a way that’s not in accordance with the will or the parent’s objectives.
The joint accountholder can take out loans using the joint account as collateral, creating a liability against the account and, consequently, the estate if he or she does not repay the loan. In such cases, Masterman says, “The assets in the account could be seized by creditors.”
Still another risk, Masterman says, is that the adult child who is the joint accountholder may eventually have an ex-spouse to be who contests their divorce. Then the ex-spouse could make a claim on the assets in the joint account if the account was set up prior to the divorce being finalized.
“To mitigate some of these risks,” Holjevac says, “clients can have a working joint account set up that is only for current expenses, not all the assets.”
Alternatively, if there is more than one child, she adds, your client can set up the joint account so that all the adult children are named on the account, then require two or more signatures to access the available funds.
Your clients also should consider taxation consequences. When a client designates an adult child as a joint accountholder, Van Cauwenberghe says, the child will have to report the proportionate amount of unrealized gains at the time he or she (or adult siblings as well) is added to the account. That’s because the transfer of assets into a joint account could result in a “deemed disposition.”
Practical for some clients
Adds Van Cauwenberghe: “So, in an effort to save the estate probate fees after the client’s death, the client would be paying capital gains taxes at the time of transferring the assets into the joint account.”
You must explain to your clients the consequences of avoiding probate fees vs the potential implications, she adds.
Despite the challenges and risks to your client in setting up a joint account with an adult child, the strategy still can be useful for some clients. For example, Holjevac says, a joint account can be practical if the child is an only child.
This strategy also can be helpful if the parent is incapacitated mentally and the existing will does not provide for a tax- efficient transfer of assets due to incapacitation; if the will doesn’t specify the possibility of incapacitation, it can’t be changed later, says Holjevac: “In such circumstances, if the child holds POA, a joint account would facilitate access and distribution of assets in a more appropriate manner.”
Instead of using a joint account to enable the right of survivorship in certain situations, your clients can designate a beneficiary for certain assets, such as insurance policies and TFSAs. This would allow the proceeds to be paid directly to the named beneficiary and will not be part of the estate.
In addition, your clients can “gift” assets to children to avoid probate fees, but must recognize that gifting can trigger capital gains taxes.
For more insight on joint accounts and estate planning, read Ellen Bessner’s Inside Track column Demystifying the confusion associated with joint accounts.
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