Holding property jointly has long been called the “poor man’s will”—a way for a person to transfer wealth on death without spending the money to draw up proper documents. It’s also an appealing way for married couples or parents to minimize probate taxes in provinces where rates are high.
THE HIGHEST PROBATE TAX RATES
$15.23 per $1,000 in excess of $100,000
$15 per $1,000 in excess of $50,000
$14 per $1,000 in excess of $50,000
So, if a client is considering transferring property into joint ownership with a spouse or children, play devil’s advocate and explain the risks:
If your client puts property into the name of one of her children, and that child claims his mother wanted him to be the sole owner of the property, there’s bound to be a fight when she dies. The siblings will say their mother made the arrangement for convenience and their brother is merely holding that property in trust for the estate. Expect a costly legal battle.
The gifted interest in the property can’t be recovered without the consent of the other owner(s). A separation from the spouse or an estrangement from one or more of the children could leave the client with a bad case of donor’s remorse.
The transfer can have immediate negative tax consequences by triggering capital gains.
If any of the joint owners gets into financial trouble or a divorce-related property fight (or any other legal dispute), the property will be at risk.
If the property has the potential to generate significant income or capital gains after the client dies, a testamentary trust may be a better option. These trusts are created under a taxpayer’s will and are taxable at graduated rates. This opens the door to income-splitting that, over time, can generate enough income tax savings to dwarf the probate taxes.
If a client still wants to proceed with joint ownership, fine, but refer her to tax and legal specialists who can reiterate the risks.
DO YOU WANT YOUR KIDS TO FIGHT OVER THE HOUSE?
Unless indicated, joint ownership assumes the “right of survivorship.” This means when one joint owner dies, the survivor acquires an enhanced value because she no longer has to share it with the estate of the deceased.