Us­ing a joint ac­count to avoid pro­bate fees can back­fire.

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us­ing a joint ac­count as part of an es­tate plan­ning strat­egy is a pop­u­lar prac­tice among Cana­di­ans.

An ag­ing par­ent may place his or her as­sets into an ac­count that’s shared with an adult child. When the par­ent dies, ac­cord­ing to the strat­egy, the as­sets be­come the prop­erty of the child, and thus will avoid the pro­bate process and pro­bate fees. Hold­ing a joint ac­count with a spouse or an­other per­son of­fers the same ben­e­fit.

But while hold­ing as­sets jointly can be ben­e­fi­cial in cer­tain sit­u­a­tions, do­ing so is not al­ways ad­vis­able. If the strat­egy is not doc­u­mented prop­erly, for ex­am­ple, the prac­tice can re­sult in un­in­tended and un­de­sir­able con­se­quences.

Chris­tine Van Cauwen­berghe, vice pres­i­dent, tax and es­tate plan­ning, with In­vestors Group Inc. in Win­nipeg, says she doesn’t rec­om­mend the use of joint ac­counts in es­tate plan­ning and sug­gests that clients should ex­er­cise cau­tion be­fore adding joint own­ers to their as­sets.

The key is to make sure your clients un­der­stand the true in­tent for us­ing a joint ac­count.

“The pre­dom­i­nant rea­son why clients use joint ac­counts is to avoid pay­ing pro­bate fees,” says Keith Master­man, vice pres­i­dent, tax, re­tire­ment and es­tate plan­ning, with CI In­vest­ments Inc. in Toronto.

Master­man asks: “Is it worth­while to hold as­sets jointly just to avoid pay­ing the pro­bate fees, which are not sig­nif­i­cant?”

Pro­bate fees, which vary by prov­ince, can be con­sid­er­ably lower than other forms of tax­a­tion. The high­est pro­bate fees, for ex­am­ple, are levied in On­tario (where the pro­bate fee is known as the “es­tate ad­min­is­tra­tion tax”). That prov­ince charges 0.5% on the es­tate’s first $50,000 and 1.5% on the value of the es­tate in ex­cess of $50.000. In Bri­tish Columbia, the tax is 0.6% on the por­tion of the es­tate val­ued be­tween $25,000 and $50,000, and 1.4% on the amount in ex­cess of $50,000.

“In On­tario, that’s a one-time fee of less than $1,500 on an es­tate val­ued at $100,000, or less than $15,000 on an es­tate val­ued at $1 mil­lion,” Master­man says.

Beyond the fees as­so­ci­ated with pro­bate, some clients may use joint ac­counts as a way of avoid­ing the pro­bate process, which can be lengthy and costly, al­to­gether, says Heather Hol­je­vac, se­nior wealth ad­vi­sor with TriDelta Fi­nan­cial Part­ners Inc. in Oakville, Ont.

Spouses com­monly hold joint ac­counts in the form of joint bank and in­vest­ment ac­counts, as well as hold­ing real es­tate as joint ten­ants. Un­der joint ten­ancy, the as­sets au­to­mat­i­cally be­come the prop­erty of the sur­viv­ing spouse upon the death of one spouse.

The In­come Tax Act al­lows for as­sets to be trans­ferred to the sur­viv­ing spouse on a taxde­ferred ba­sis and this does not nec­es­sar­ily re­quire any prior es­tate plan­ning. (This tax-free rollover also ap­plies to RRSPs and RRIFs for which the ac­count- holder’s spouse is named as a ben­e­fi­ciary.)

In an­other com­mon join­tac­count strat­egy, as men­tioned above, a par­ent holds a non­reg­is­tered fi­nan­cial as­set, such as a bank ac­count, jointly with an adult child.

Easy access to cash

“Such ac­counts fa­cil­i­tate easy access to cash if the par­ent were to die and cash is re­quired to pay ex­penses,” Master­man says. “If the ac­count was held only in the par­ent’s name, ac­cess­ing the funds could be dif­fi­cult.”

Adds Hol­je­vac: “Joint ac­counts also can make it eas­ier for the child to man­age day-to-day ex­penses for the par­ent if the ac­count re­quires only the sig­na­ture of the child to ex­e­cute a trans­ac­tion ver­sus the sig­na­tures of both the par­ent and child.”

Van Cauwen­berghe rec­om­mends us­ing a power of attorney (POA) des­ig­na­tion in­stead of a joint ac­count for han­dling daily ex­penses.

“Some par­ents, for ex­am­ple, might think an [adult child act­ing as] joint owner will make main­tain­ing their as­sets eas­ier in the event that they’re no longer ca­pa­ble of do­ing so,” Hol­je­vac says. “But that’s ex­actly what the POA is sup­posed to achieve.”

In fact, Hol­je­vac adds, POA doc­u­ments can be de­signed to re­strict the child to act only in cer­tain cir­cum­stances, such as in­ca­pac­ity.

The ad­di­tion of an adult child as a joint owner of an as­set can have un­in­tended con­se­quences if the ob­jec­tive of joint own­er­ship is not clearly es­tab­lished.

Al­though the joint ac­count cre­ated by par­ent and adult child might have been es­tab­lished for con­ve­nience while the par­ent is alive, the child of­ten as­sumes the right of sur­vivor­ship when the par­ent dies — that is, the child will be­come the ben­e­fi­cial owner of the as­sets. That might be the plan, but also may con­tra­dict a sep­a­rate es­tate plan.

“The dan­ger is that mak­ing an ac­count ‘joint’ could com­pro­mise the over­all es­tate strat­egy set up in a will and over­ride it,” Hol­je­vac says. “If there is more than one child and the ac­count is made ‘joint’ with only one child, then those as­sets could [go to that one child], as there is no obli­ga­tion to in­clude these as­sets in the over­all es­tate trans­fer.”

This sit­u­a­tion can lead to fam­ily dis­putes or spur le­gal ac­tion if other sib­lings believe they are en­ti­tled to a share of the as­sets in the joint ac­count.

There have been sev­eral court cases in which the right of sur­vivor­ship of as­sets by a joint ac­coun­tholder has been chal­lenged by other sib­lings, says Van Cauwen­berghe.

Two cases de­cided by the Supreme Court of Canada a decade ago — Pecore v. Pecore and Madsen Es­tate v. Say­lor — demon­strate that var­i­ous cir­cum­stances may be at play in de­ter­min­ing whether as­sets held in a joint ac­count re­vert to the de­ceased par­ent’s es­tate or to the joint ac­coun­tholder child upon the par­ent’s death. The right of

sur­vivor­ship at­tached to many joint ac­counts is not iron­clad and can some­times be chal­lenged.

These court cases, while com­plex, raise doubts about the com­monly held be­lief that the adult child would en­joy the right of sur­vivor­ship and be­come the ben­e­fi­cial owner of the as­sets.

Given the prospect of costly lit­i­ga­tion, Van Cauwen­berghe says, set­ting up joint ac­counts “begs the ques­tion as to why the client is do­ing it in the first place.”

To make the right of sur­vivor­ship stick, Master­man says, the key ques­tion is: “What is the in­tent of set­ting up a joint ac­count?” Did the par­ent in­tend to give the as­sets in the joint ac­count to the adult child? If that is the case, Master­man says, put it in writ­ing.

“You must doc­u­ment the liv­ing day­lights out of it,” he says. “And you must present suf­fi­cient ev­i­dence to sup­port the con­tention that the de­ceased wanted the joint ac­coun­tholder to get the as­sets upon death.”

To min­i­mize dis­putes, Master­man sug­gests, your clients should com­mu­ni­cate their in­ten­tion clearly to their l oved ones. “[Your clients] must know their ben­e­fi­cia­ries well and rec­og­nize that they might have dif­fer­ent per­son­al­i­ties [re­gard­ing money].”

Drain­ing the ac­count

What­ever the in­ten­tion be­hind set­ting up the joint ac­count, there is an­other risk: all the as­sets in the ac­count can be­come ex­posed to the adult child’s vul­ner­a­bil­i­ties.

For ex­am­ple, Hol­je­vac says, an ir­re­spon­si­ble child could drain the ac­count set up to help man­age the par­ent’s per­sonal care. Funds ear­marked for the es­tate and other chil­dren could be squan­dered or dis­trib­uted in a way that’s not in ac­cor­dance with the will or the par­ent’s ob­jec­tives.

The joint ac­coun­tholder can take out l oans us­ing the joint ac­count as col­lat­eral, cre­at­ing a li­a­bil­ity against the ac­count and, con­se­quently, the es­tate if he or she does not re­pay the loan. In such cases, Master­man says, “The as­sets in the ac­count could be seized by cred­i­tors.”

Still an­other risk, Master­man says, is that the adult child who is the joint ac­coun­tholder may even­tu­ally have an ex-spouse to be who con­tests their di­vorce. Then the ex-spouse could make a claim on the as­sets in the joint ac­count if the ac­count was set up prior to the di­vorce be­ing fi­nal­ized.

“To mit­i­gate some of these risks,” Hol­je­vac says, “clients can have a work­ing joint ac­count set up that is only for cur­rent ex­penses, not all the as­sets.”

Al­ter­na­tively, if there is more than one child, she adds, your client can set up the joint ac­count so that all the adult chil­dren are named on the ac­count, then re­quire two or more sig­na­tures to access the avail­able funds.

Your clients also should con­sider tax­a­tion con­se­quences. When a client des­ig­nates an adult child as a joint ac­coun­tholder, Van Cauwen­berghe says, the child will have to re­port the pro­por­tion­ate amount of un­re­al­ized gains at the time he or she (or adult sib­lings as well) is added to the ac­count. That’s be­cause the trans­fer of as­sets into a joint ac­count could re­sult in a “deemed dis­po­si­tion.”

Prac­ti­cal for some clients

Adds Van Cauwen­berghe: “So, in an ef­fort to save the es­tate pro­bate fees af­ter the client’s death, the client would be pay­ing cap­i­tal gains taxes at the time of trans­fer­ring the as­sets into the joint ac­count.”

You must ex­plain to your clients the con­se­quences of avoid­ing pro­bate fees vs the po­ten­tial im­pli­ca­tions, she adds.

De­spite the chal­lenges and risks to your client in set­ting up a joint ac­count with an adult child, the strat­egy still can be use­ful for some clients. For ex­am­ple, Hol­je­vac says, a joint ac­count can be prac­ti­cal if the child is an only child.

This strat­egy also can be help­ful if the par­ent is in­ca­pac­i­tated men­tally and the ex­ist­ing will does not pro­vide for a tax­ef­fi­cient trans­fer of as­sets due to in­ca­pac­i­ta­tion; if the will doesn’t spec­ify the pos­si­bil­ity of in­ca­pac­i­ta­tion, it can’t be changed later, says Hol­je­vac: “In such cir­cum­stances, if the child holds POA, a joint ac­count would fa­cil­i­tate access and dis­tri­bu­tion of as­sets in a more ap­pro­pri­ate man­ner.”

In­stead of us­ing a joint ac­count to en­able the right of sur­vivor­ship in cer­tain sit­u­a­tions, your clients can des­ig­nate a ben­e­fi­ciary for cer­tain as­sets, such as in­surance poli­cies and TFSAs. This would al­low the pro­ceeds to be paid di­rectly to the named ben­e­fi­ciary and will not be part of the es­tate.

In ad­di­tion, your clients can “gift” as­sets to chil­dren to avoid pro­bate fees, but must rec­og­nize that gift­ing can trig­ger cap­i­tal gains taxes.

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