This discussion applies to “joint ownership” of houses and bank accounts.
For a discussion of ‘beneficiary designations’ (insurance, TFSA, RRSP, RRIF) click here.
Joint ownership with spouse = likely good; joint ownership with adult child = very risky!
If you own an asset (for instance a house or bank account) in joint tenancy with a right of survivorship with your spouse then on your death 100% of that asset should belong exclusively to the other joint owner. The asset will not be part of your estate, and no probate is necessary.
This can be a very efficient and effective way to hold assets, especially with your spouse (whether married or common law).
However, joint ownership with an adult child is a whole other matter.
If you want to put any property in joint tenancy with anyone other than your spouse, get good legal advice. The advice of a bank teller is not good legal advice. If you want to make arrangements so that an adult child can pay your bills, use a properly drafted power of attorney for property, not a joint bank account.
Joint with your spouse may work – but be careful
Joint tenancy between spouses does make things simpler if your intention is that your spouse inherit 100% of the assets with complete freedom to dispose of it as your spouse may wish.
Often it is possible to avoid probate for the first spouse to die entirely if the house and bank accounts pass automatically to the surviving spouse. This is a significant savings of time, money and hassle.
Thus, joint ownership of houses and savings works well for couples who have the same ‘ultimate beneficiaries’ (the same children, usually).
However, joint ownership can be risky if there is a concern that the surviving spouse’s estate may not benefit the same ‘ultimate beneficiaries’. This is a common problem when the spouses have children from prior relationships. In these circumstances it is better to use some combination of ownership as ‘tenants in common’ and a ‘life estate’ (or ‘life interest’), which is a form of trust, for the surviving spouse. Using these planning tools, it is possible for each spouse to benefit there own preferred ultimate beneficiaries while ensuring that the surviving spouse is provided for during their lifetime.
Joint ownership with an adult child is very risky
Unless the child can prove that you intended to give the asset to them, the asset is deemed to form part of your estate and is subject to probate unless the child can prove that a gift to them alone was intended.
Jointly owned bank accounts and houses are an invitation for family disputes and expensive litigation. If you really want to make a gift to an adult child, you absolutely must document your intention, and better yet, you should probably give them the asset outright and not retain a joint interest in it.
The law presumes (called a ‘presumption of resulting trust’) that a financially independent child who is a joint owner with their parent of any asset holds that asset in trust for the benefit of the parent’s estate. This presumption applies to real estate (houses, cottages, etc.) and to bank accounts.
While there is some uncertainty in the law, this presumption probably does not apply to beneficiary designations of life insurance, RRIFs, RRSPs, and TFSAs.
This presumption is rebuttable. It is still possible for the adult child co-owner to prove that the deceased intended to give the property exclusively to that adult child, but the onus of proving this gift rests on the adult child. Unless the adult child who is joint with the parent can provide clear and compelling evidence that the parent intended an outright gift to that child alone, the surviving child will be deemed to hold the property in trust for the estate of the deceased parent.
If you intend to make such a gift via a joint tenancy, then you should sign a written “declaration of gift” that states your intentions clearly.
In summary, on the death of the parent, real estate and bank accounts jointly held with an adult child:
a) do not automatically pass to the child who is the joint owner;
b) probate will likely be required; for instance, the financial institution where the asset or account is held (especially investments) should (or at least may reasonably) refuse to release the funds to the surviving adult child (joint owner, with their deceased parent); and,
c) the joint asset needs to be disclosed to the estate trustee and residual beneficiaries of the estate.
Joint tenancy with an adult child is a recipe for disaster. It is not an easy or quick way to avoid probate or estate administration tax. It is weak estate planning, when there are so many better options.
Other potential problems
In addition to the potential conflict about the estate, there are several other potential problems arising from joint tenancy with an adult child:
Income tax problems
Joint tenancy between parent and child does not avoid any income taxes and can potentially cause more income tax to be payable than if joint tenancy were not used. In particular if an adult child who does not live in their parent’s home is made joint with the parent on the parent’s home, then the child cannot claim the principle residence exemption with respect to gains in value on their half of the asset and the parent can only shelter one half the gains from the date of transfer to joint tenancy.
An asset transferred into joint tenant with an adult child is exposed to the creditors of the adult child. Consider this scenario: parent transfers fully-paid mortgage-free house into joint tenancy with adult child. Adult child later is sued by their former partner (spouse, or business partner) and order to pay a large debt. The former partner can now pursue their claim against the house, going so far as to force the ‘partition and sale’ of the house to satisfy the debt owed by the adult child to the former partner.
If your intention is to gift an asset to one of your adult children by way of joint ownership, the key is clear documentation of that intention. The best is a ‘deed’ in which you set out the intention to gift clearly.