Transferring assets into joint tenancy, often with adult children, is an estate planning tool that people hear about. While joint tenancies can be a useful in some situations, they should be used with caution.
What is a joint tenancy? Owning an asset as joint tenants means that the asset is owned by two or more people, and on one owner’s death, the asset passes entirely to the surviving joint owner(s) by what is called the “right of survivorship”.
There are some estate planning benefits to creating joint tenancies. For example, an asset held in joint tenancy is not considered part of a deceased person’s estate, so on death it passes to the surviving owner(s) with or without a will. This has the effect of avoiding probate fees of approximately 1.4% payable on the asset. Also, as the asset is not in the estate it would not be captured on a wills variation claim by a spouse or child. Additionally, there is relatively easy access to the asset on the death of the transferor as probate is not required, and transferring assets into joint tenancy is a fairly straightforward process.
At first glance, it may appear that ownership in joint tenancy provides an alternative to other estate planning tools. However, the benefits of joint tenancies can be outweighed by significant long-term consequences both financial and otherwise.
The following are a few points of caution:
- Exposure to creditors or ex-spouses. Transferring an asset into joint tenancy with another person exposes that person’s interest in the asset to claims by their creditors or spouse on separation. The risk of exposure to creditors was demonstrated in the recent BC case of Gully v. Gully, in which a mother transferred her house into joint tenancy with her son, without the son’s knowledge. The son was later found to owe money to a creditor, and the creditor was entitled to claim against the son’s half interest in the house. A joint tenant’s interest in an asset may also be subject to a family law claim on separation from a spouse.
- Tax consequences. The transfer of property into joint tenancy could result in income tax on any capital gains payable by the transferor. Also, in some situations property transfer tax will payable when a transfer of real estate into joint tenancy is registered. Finally, transferring your home into joint names with, for example, your children could result in the partial loss of the principal residence exemption to income tax on capital gains. It is important to seek tax advice when contemplating a change in ownership.
- Loss of control. Once the asset has been transferred into joint tenancy, you cannot get the asset back into your sole name, or sell or mortgage it, without the agreement if the other owner(s). What if you have a falling out with your child that you put on title to your home? Also, a joint tenant can “sever” the joint tenancy without the other’s permission. As a result, on one owner’s death, the deceased’s interest in the asset will pass not to the surviving owner, but rather to the deceased’s own estate.
- Estate planning consequences. Having an asset pass on death to a joint tenant may not have the intended estate planning effect. There are several cases in which the existence of a joint tenancy has raised questions as to how the original owner intended for the asset to pass on their death. In some instances, courts have found that such an asset actually does not pass to the surviving owner, but is rather held in “trust” for the deceased’s estate. It is important to document intention when transferring assets into joint tenancy to reduce the possibility of later claims. In addition, as the asset will pass through the estate of the last joint tenant to die, this could have unintended consequences. For example, a parent puts her home in joint tenancy with her two children. If one of those children dies, his or her children will not receive an interest in the property – the entire property may eventually go to the children of the surviving child. This may not be what the parent intended. Careful consideration about the use of joint tenancies is needed in blended family situations.
- Family law consequences. Family law in B.C. views certain assets to be excluded from division on relationship breakdown. However, there are numerous cases where the transfer of an excluded asset into joint names with the other spouse has resulted in the loss of the exclusion on separation. If the asset that you are considering transferring into joint tenancy is an asset that you acquired prior to the relationship, or was a gift or inheritance (e.g. from a parent), then you should seek legal advice before changing ownership.
If you are contemplating placing assets into joint tenancy, consider seeking legal advice first. The creation of joint tenancies should be part of a larger estate planning discussion with a legal professional.
BC’s Make-a-Will Week is April 7-13, 2019. MAWW is a Ministry of Justice campaign that brings awareness to the importance of creating and maintaining an up-to-date will, which ensures that the people, charities and organizations you care about most receive the benefit of your estate.
In conjunction with the Leave a Legacy Vancouver program of the Canadian Association of Gift Planners, we are sharing tips and info throughout the week to help our readers learn more about wills and their pertinence in ensuring that final wishes are understood and executed. Visit our blog all week for key posts related to MAWW and will preparation.