Joint Accounts

Joint Accounts and Estate Planning

October 2016

When you pass away it is typically required that your last will and testament be legally approved by the courts under the laws of the province. This process is called probate and in Manitoba the province charges a fee for probating a will, they charge 0.07% of the value of the estate, or $7 per $1,000. When planning their estate many folks will take steps to minimize these fees. One of the strategies often used is to place assets into joint names with rights of survivorship.That way when an individual passes away the assets jointly held will not be part of their estate and will not be charged probate. The asset will go directly to the surviving joint owner. Joint accounts, particularly between spouses, can be beneficial. However a growing trend is for an aging parent to add one of their adult children as joint owner on their assets. That arrangement can be more complex, a few of the issues that might arise:

Immediate tax bill
If you own an asset and then later transfer the ownership into joint names, to anyone other than your spouse, you are effectively selling or gifting your ownership interest at fair market value, which might trigger a tax hit.

Assets are open to additional claims by creditors
With a new joint owner the asset may be exposed to additional claims by creditors. For example if you have an investment account and transfer the investment into joint ownership with your son, if your son runs into financial trouble or goes through a divorce, they could come after your investment account.

Loss of control of the asset
Once you add another person as a joint owner on an asset, you no longer have full control of the asset. If for example you add an adult child as joint owner on your investment account and later the two of you disagree on the direction of the account, it could be problematic. In addition, once a joint owner is add edit is hard to remove them. The other owner will have to agree to the changes.

Taxes on principal residence
If you decide to place real estate into joint names with your adult child, it may create complications for the principal residence exemption. While the joint ownership will allow the property to bypass your estate and avoid probate, if you intended to use your principal residence exemption to avoid capital gains tax, you can now only use the exemption on your portion of the property. As well if your child has another property, they will now have to choose which property they want to claim for their exemption.

Estate distribution may be inappropriate
If your intention, for example, is for your estate to be equally divided amongst your children, but you have added one of your children as joint owner on your investment account, it could be problematic. The investment account, will avoid probate, but it will pass directly to the child listed as joint owner, and they are not obligated to share. This may not be the consequence you intended and it can lead to family disputes.

No one likes paying additional fees, I believe a prudent estate plan will consider ways to minimize probate costs. However, joint ownership, particularly with adult children should be used with caution. I encourage folks to seek proper legal and tax advice to ensure there are no unintended consequences.

 

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

 

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.