Placing assets in joint names may well be an effective estate planning hack.  Considering all it takes to add a joint owner on a bank account is a quick trip to the bank or to a lawyer in the case of a real estate deed.

It costs time and money to properly create a will and power of attorney documents and generally involves two or more meetings with one’s lawyer, and possibly involves one’s accountant and financial advisor as well.

We have busy lives and want to get things done fast.

So instead, by adding an intended beneficiary who may also be the intended attorney for property as a joint owner we can avoid the hassle of dealing with and paying for the services of the advisors.  Budda boom, budda bing!

The new co-owner inherits the property on the original owner’s death by right of survivorship and in the meantime, can also deal with that asset on behalf of the original owner in the event of incapacity. The asset no longer flows through the estate when the original owner dies so there is no probate payable!  Brilliant!!!

Simply putting assets into joint ownership is estate plan hacking anyone can do.  It saves time and money.

Or does it? Let’s take a step back to give this estate planning hack a Holmes on Homes style scrutiny.

We estate plan to make sure that our assets are directed to the right beneficiaries upon death.  A will accomplishes this.

We also estate plan to ensure that we have a plan in place in the event of possible future mental incapacity.  So, if we lose mental capacity the person(s) we have appointed to make our financial decisions will have the required legal authority.  We create a power of attorney to accomplish this.

Many advisors report the onset of a queasy feeling when clients direct them to add a friend or family member as a joint owner to an asset.

Where does that feeling come from?  Is it grounded in reality?

Here is the real deal on joint ownership:

Unless the new joint owner is a spouse (and even sometimes with spouses), unfortunately, there are almost always unintended implications of using the joint ownership estate planning hack.

There are certain legal presumptions concerning asset ownership depending on the nature of the asset and the nature of the relationship between asset holders.  If the asset is personal property (including bank accounts), the legal presumption is joint ownership with a right of survivorship.  If the asset is realty (real estate), and the type of ownership is not otherwise stated, the law presumes the ownership is as tenants-in-common. A tenant in common only owns a discrete portion of the asset, such as 50%, and does not inherit the entire value upon the death of one owner.

If the transfer is to an adult child, the law presumes that the asset has not truly been transferred unless there is evidence (preferably in writing) at the time of the transfer that the parent intended to make a gift.  There is a legal presumption that the asset transfer to joint ownership was done for the sake of convenience for the parent during his, her or their lifetime to empower the new joint owner/adult child to assist in managing that asset and potentially also to avoid probate. Unless there is evidence of a gift, upon the death of the parent the gift legally reverts to his, her or their estate.  The estate’s executor is legally responsible to consider that jointly held asset an asset of the estate and must remit probate on the value of the joint asset.

What that means is that although the adult child can deal with the asset as a matter of convenience during the parent’s lifetime, upon death, the asset flows through the estate to be transferred as directed in the will or as the law would state on an intestacy if there is no will.  Probate is not avoided, and a gift has not been made outside the provisions of the will.

Second, when an asset is placed into joint ownership with a person other than a spouse, there is a deemed disposition of half of the value of that asset and capital gains tax on any appreciated gain is payable at the time the new joint owner is added.

To illustrate this point, if the transferred asset is a parent’s principal residence then there will be no immediate tax consequence because capital gains taxes are not payable on the appreciated value of a principal residence.  However, if the child does not live in the house then upon the death of the parent, a capital gain on half of the house’s increase in value since the time of transfer is payable.  Here’s how this would look: if the house was worth $400,000 at the date of transfer in 2020 and worth $600,000 at the date of death in 2030, then half of the gain would be attributed to the child and tax payable would be around $25,000 (depending on the child’s tax rate). Probate is still payable unless there is evidence of an intent to gift, as discussed above.  If there is no evidence of a gift, probate and capital gains taxes are both payable. On an asset worth $600,000 the probate tax payable would be $8,250. Had the transfer not occurred in 2020, there would have been around $25,000 less to pay in taxes.

If the asset transferred to joint ownership is not a principal residence but rather a cottage, income property or investment account, for example, and there was an appreciated gain on the property at the time of transfer, then capital gains tax on 50% of the value of the gain on the asset is payable at the time of transfer to the child.  As well, unless there is clear evidence of a gift, or unless there is a secondary will, combined with evidence to show the parent’s intention to create a bare trust and avoid probate, probate is also payable at the death of the parent.

In addition to unnecessary tax payments, there are other reasons to tread carefully when considering the joint ownership estate planning hack.  Needless to say, that when a new owner/child is added, the original owner loses control of that asset and must seek the permission of the new owner to sell, mortgage, or otherwise dispose of the property or account.  This is not what most parents/original owners have in mind.

When there is no documented intention at the time of transfer to prove the intention of a gift or a bare trust to be held for the estate, then the child, upon the death of the parent, may contend that the parent’s intention was a gift. Even if it was, the sheer volume of litigation in this area shows that memories are short, and intentions do not always play out on death.

Due to the lack of clarity of intention surrounding many asset transfers to adult children, another inference made is that the asset is truly the asset of the adult child and as such the asset is brought into family law disputes for the purpose of property separation upon divorce.  Certainly, the parent would not have intended to share such an asset with an ex-in-law.  Creditors of adult children, too, can make claims on these assets.

As with many things, in estate planning too, there is more than one means to an end.  But the best solutions generally require help from an expert to ensure that the original owner’s intentions at the time of transfer are respected.  Is the transfer intended as a gift of part or all the property at the time of transfer?  Is the transfer intended only to avoid flowing through the estate and attracting probate taxes?  Is the transfer a way to get assistance with asset management at a time of impending incapacity issues?

The means recommended based on the original owner’s desires, will depend on the assets owned, the family situation and the original owner’s tolerance for sophisticated planning.

One mechanism to accomplish both incapacity planning and probate avoidance is the revocable alter ego or joint partner trust. These trusts provide the child or other beneficiary immediate access to the asset upon the death of the parent, allows for fluidity of asset management if the parent loses mental capacity, retains control of the asset in the parent’s hands during life and poses no tax issues to the child/beneficiary. Capital gains taxes are not payable upon asset transfer to the trust.  The ultimate owner’s creditors and spouses cannot claim any ownership interest in the assets while they remain in the trust.

Another simple technique to address incapacity and to get assistance with the management of one’s assets is to appoint someone in a continuing power of attorney for property document.  This can be a trusted loved one or a professional trustee such as a trust company.  Either way, asset management can commence upon incapacity or prior to, as the original owner directs. The appointed attorney must act as a fiduciary to the original owner.

A secondary will can be used to avoid probate in the case of assets held in trust, first dealings real estate (to be discussed in another upcoming blog), jointly held accounts, household goods and personal effects and shares of privately held corporations. As Mike Holmes would say, “Make it right!”.  Take the time to consult your trusted advisors and do it right.