If you’re on top of your finances, great job! That’s a step in the right direction.

While you may have your TFSA and RRSP accounts sorted out, you may not have started creating a comprehensive estate plan. This is often an overlooked aspect of financial planning. And while we understand the idea of contemplating your mortality can be uncomfortable, it’s essential to have your estate planning in place.

If you’re able to understand the intricacies of estate planning and properly execute it, then this will simplify the administration of your estate, minimize probate fees, and ensure a smooth transfer of assets to your intended beneficiaries.

In this blog, the Insightful Wealth team is diving into a specific part of estate planning that you may have heard of: joint ownership with the right of survivorship. It’s a common strategy employed by many, but it comes with its own set of advantages and potential pitfalls.

Get professional advice about joint ownership and your estate planning.

Before you finalize your estate documents, let’s make sure you have all the information you need to make the most informed and beneficial decisions based on your unique needs.

Understanding Joint Ownership With Right of Survivorship

First, we want to make sure that we’re all on the same page. So, let’s begin with some simple definitions.

Joint ownership, specifically joint tenancy, is a legal arrangement where two or more individuals share ownership of an asset. Each owner has an undivided interest in the property. These individuals can be parents and children, spouses, or even business partners.

Now, add on the “right of survivorship” to this. It’s as it sounds: on the death of one of the asset holders, the ownership transfers into the surviving owners’ hands without having to go through a will.

While this strategy is widely used among married couples, it has gained popularity among parents and children in more recent years.

Possible Challenges in Dealing With Joint Ownership

Joint ownership with the right of survivorship sounds simple enough, right? While the intent is usually to try to reduce or eliminate probate and simplify administration, there are still potential pitfalls to be aware of.

Income Tax Implications

When a parent transfers ownership to a child through joint tenancy, it triggers potential income tax implications. The transfer is treated as a disposition for tax purposes, meaning the parent is deemed to have sold a portion of the property at its fair market value. 

This means that any capital gains on this deemed sale are added to the parent's income in that tax year, potentially pushing them into a higher tax bracket. Moreover, the child inherits the property at this adjusted cost base, and any future appreciation could result in capital gains for the child, subjecting them to additional tax liabilities. 

This complex interplay of capital gains has significant financial consequences for both the parent and the child.

Loss of Control

Once established, joint ownership cannot be easily cancelled.

While issues don’t arise as frequently when joint ownership is mainly utilized by spouses or partners, it can become increasingly complicated between parents and children. 

The decision to add a child's name to a real estate property means relinquishing the ability to unilaterally make decisions about that property. This lack of flexibility means that the real estate property cannot be sold without the consent of all joint owners, leading to potential conflicts.

Creditor Exposure

Joint ownership exposes the asset to the creditors of all joint owners. If one joint owner faces financial difficulties, such as being sued or declaring bankruptcy, the jointly held asset becomes vulnerable. 

For instance, if a child, added as a joint owner, encounters financial troubles, creditors could lay claim to the asset, jeopardizing the parent's original intent.

In cases of marriage breakdown, if the joint owner is married, the asset may be subject to equalization claims, further complicating the financial landscape.

Blended Family Challenges

Joint ownership can complicate matters in blended families, leading to conflicts over the distribution of assets and the potential exclusion of beneficiaries from a prior marriage. We highly recommend using joint ownership in blended families with caution and careful consideration.

Capacity Issues

What if you or your partner becomes incapacitated? Or your elderly parent is no longer fit to make decisions? The challenges extend beyond mere property management.

In the absence of a power of attorney, the other joint owner may face difficulties managing the property and making critical decisions. This emphasizes the importance of not only contemplating the current joint ownership arrangement but also planning for potential future scenarios involving incapacity.

Probate Concerns

While joint tenancy is often utilized to bypass probate fees, it does not provide a guarantee. If the transferor's intent in establishing joint tenancy is unclear or contested, the estate may still be subject to probate. 

For instance, if the joint tenancy arrangement is challenged as not being a true gift but rather a resulting trust, the court may require probate to ascertain the deceased's original intent.

Review your options with a trusted Insightful Wealth financial advisor.

Joint Ownership vs. Resulting Trust

One reason people set up joint ownership is for convenience, especially when it comes to things like bank accounts or property, because they believe it avoids probate and is easier to settle with respect to required documents. It's like sharing ownership with someone else, making things easier, in case something happens to one person.

That said, if the person who set up joint ownership didn't intend to give full ownership to the other person, then a resulting trust arises. 

Resulting trust is like a safety net. It kicks in when it turns out the person who passed away didn't want the other person to own everything. They might have just wanted to make things more convenient, because naming beneficiaries to Registered accounts will help eliminate probate, and not hand over complete ownership. 

To avoid confusion and make things clear, it's crucial to write down what you meant when setting up joint ownership. Did you intend to give a gift, or did you just want things to be easier to manage? Documenting your intentions helps avoid any misunderstandings later.

Alternative Strategies

Considering the complexities associated with joint ownership, exploring alternative strategies such as designations in insurance products, trusts, and beneficiary designations for Registered Accounts and insurance products may offer more attractive and well-documented alternatives.

Start Your Estate Planning Now

Estate planning requires careful consideration of various factors, and joint ownership, while seemingly simple, comes with its own set of challenges. Seeking professional advice and exploring alternative strategies can ensure that your estate plan aligns with your goals, while also minimizing potential risks and complications. 

At Insightful Wealth Group, we are dedicated to working closely with our clients to establish comprehensive and tailored estate plans that prioritize your unique needs and objectives. Remember, a well-thought-out estate plan is not just a financial safeguard; it's a legacy of care and consideration for your loved ones. Talk to our team now!

Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The views are those of the author, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.