Estate Planning: Property Held in Joint Tenancy
Joint tenancy is often used as a tool to simplify estate planning and avoid probate on an estate. However, it can create some unintended consequences...
Many of my estate planning clients ask me about joint tenancy as a tool for simplifying their estate planning and avoiding probate. Whether property held in joint tenancy will have the intended result will depend on the person it is held with and the type of joint tenancy created...
Joint Tenancy with a Spouse
Often, property such as a home or bank account is held in joint tenancy with a spouse. In such a situation, upon the death of a joint-tenant spouse, the property is automatically passed to the other joint-tenant spouse, by-passing the estate of the deceased spouse and avoiding probate altogether. Any capital gains tax liability on the property resulting from a deemed disposition upon death can also be deferred until the property is sold by the surviving spouse or upon the death of the surviving spouse. If the property is a principal residence of the deceased spouse, no capital gains tax liability will result from the deemed disposition of the principal residence.
Joint Tenancy with an Adult Child
Things get a lot more complicated if the property is held in joint tenancy with an Adult Child or other non-spouse relative. In such a case, there are 3 types of joint tenancy that could have been created based on the intention of the Parent or person transferring the property:
1. "True" Joint Tenancy
This is the type of joint tenancy as most people understand it: the Parent adds the Adult Child's name as a joint tenant to the property with the intention of giving the Adult Child both joint legal interest and joint beneficial interest in the property. The Adult Child receives joint ownership of the property with identical rights as the parent.
Because the Adult Child is a full joint owner of the property, the property is at risk from any claims by the Adult Child's creditors, including claims from an estranged spouse as part of a divorce proceeding.
Additionally, because the Parent is transferring joint ownership of the property to the Adult Child, she must report the disposition of half of the value of the property, and be liable for any capital gains tax on the disposition, unless the property is the principal residence of the Parent (which is exempt from capital gains tax liability).
Upon the death of the Parent, the property will automatically pass to the Adult Child, by-passing probate and its associated fees (approximately 1.5% of the value of the estate in Ontario). However, unless the property is a principal residence of the Parent, the Parent's estate will be liable for any capital gains tax resulting from the deemed disposition of the Parent's one-half of the property upon death.
2. "Resulting Trust" Joint tenancy
Another option for the Parent is to add the Adult Child's name as a legal joint tenant of the property but retain full beneficial ownership of the property. In this case, the Parent retains full ownership of the property, and the Child is simply holding the property in trust for the Parent and the Parent's beneficiaries.
Since there is no change in ownership of the property, there will be no deemed disposition and no capital gains tax liability incurred when the property is placed in joint tenancy with the Adult Child.
Upon the death of the Parent, legal title to the property will pass to the Adult Child. However, the property is, in fact, held by the Adult Child in trust for the Parent's estate and will be distributed according to the Parent's will or the rules of intestacy, if the Parent died without a will.
Property held in "resulting trust" joint tenancy will not by-pass probate, and the applicable probate fees will have to be paid by the Parent's estate upon the Parent's death.
The Parent's estate will also be liable for any capital gains tax liability incurred upon a deemed disposition of the property upon death.
3. Gift of a "right of survivorship" joint tenancy
A third type of joint tenancy is a gift by the Parent to the Adult Child of the "right of survivorship" to the property. This is similar to the "Resulting Trust" joint tenancy described in (2) above, in that the Parent retains full ownership of the property while still alive. However, unlike a "Resulting Trust" type joint tenancy, the Adult Child will inherit the property outright from the Parent upon the Parent's death, by-passing the Parent's estate and avoiding probate fees.
The Parent's estate will incur any capital gains tax liability on the deemed disposition of the Property upon the Parent's death, except in the case where the property is the principal residence of the Parent.
This third type of joint tenancy is ideal for most Parent-Adult Child joint tenancy situations since the Parent retains full ownership and control of the property while still alive and probate is avoided.
Which type of Joint Tenancy do you have?
Since Land Title registrations and bank account documents do not differentiate between the 3 types of joint tenancy, it is imperative that the Parent's intentions are properly documented. In the absence of such documentation, property held in joint tenancy with an Adult Child will be presumed at law to be held in trust by the Adult Child for the benefit of the Parent's beneficiaries.
In order to successfully rebut such a presumption, it is advisable for the Parent to clearly state, in writing, what his or her intentions are with regards to the property held in joint tenancy with the Adult Child. If the Parent intends that beneficial ownership of the jointly-held property should pass to the joint tenant Adult Child and not form part of his or her estate upon death, such intentions should be ideally documented in a legally executed document, such as a Will.