Estate planning is something that every individual should conduct in their lifetime, before it’s too late. This is becoming a major concern for the aging population of Canada. Other than this, many also want to avoid probate fees.
What is Probate?
Probate is the process of validating a will and transferring assets via court examination. When someone dies, their will goes through probate, which then incurs fees based on the size of the estate.
To avoid that, many people make their adult children ‘joint owners’ in their estate, thinking this will allow them to transfer their assets directly. But this is not the case. If your spouse is a joint owner, the assets are meant to directly pass to them. However, this is not applicable to joint ownership with children.
What is Joint Ownership?
Joint ownership refers to the legal procedure of owning an asset or property together. If a contract mentions the right of survivorship and joint ownership, the demise of the first owner automatically transfers the entire asset to the second owner. There will be no requirement to conduct a title transfer, which makes it a popular strategy for estate planning. However, when adult children are involved in this process, the space for legal pitfalls gets more prominent.
Moreover, when a parent makes an adult child their joint owner, then it is a must that all the decisions regarding the asset are being taken together. In many cases, loss of full control of the parent can lead to complications. Imagine a scenario where the child has different financial priorities and, as a joint owner, he or she wants to sell the asset to cover costs. Hence, family dynamics can majorly influence these arrangements of joint ownership. It is advised to take the guidance of a wills and estate lawyer so that you can avoid conflicts or misunderstandings within your family.
What Tax Implications of Joint Ownership?
From a financial perspective, joint ownership can create startling tax liabilities. If a parent allots part ownership of a property to their child, then this transaction will be labeled as a sale of half the property. This would lead towards capital gains taxes that might be more than the original probate fees you might have had to pay.
Take a scenario where the child is not staying at the principal residence, which is valued between 2 and 4 million dollars, but is a joint owner. For this property, the probate tax might have ranged from 28,000 to 60,000 dollars only. But now since the child is named as joint owner, he or she will be subject to high capital gains tax, especially if they are earning well.
Please note: Capital Gains taxes are calculated based on the increase in the property’s value from the transfer date to the time of final sale.
Example Calculation for Capital Gains:
Let’s say the property originally purchased at $2,000,000 is now worth $4,000,000, and the child sells their share or is deemed to have disposed of it:
- Increase in Value: $2,000,000 (from $2,000,000 to $4,000,000).
- Capital Gain: Assuming the child owns 50%, their capital gain = $1,000,000 (50% of $2,000,000).
- Taxable Gain:
- First $250,000 taxed at 50% = $125,000.
- Remaining $750,000 taxed at 66.67% = $500,025.
- Total taxable gain = $625,025.
- Marginal Tax Rate: Assuming a top federal rate of 33% and a provincial rate that varies (for simplicity, let’s assume a combined rate of around 50% for high-income earners).
- Tax Owed:
- Tax on $625,025 at 50% = $312,512.50.
Therefore, it can be seen clearly, that probate tax of 28,000 to 60,000 dollars is much less than 312,512.50 dollars.
How does Joint Ownership expose you to Liabilities?
Jointly owned assets are not only subject to estate taxes but also to any financial liabilities the child may face. For example, creditor claims or legal judgments. Another such example can be the unfortunate event of a child’s divorce. In that case, the jointly owned asset could be held for the marital asset division. Exceptions are there if protected by a prenuptial agreement.
What Are the Appropriate Situations for Joint Ownership?
There are many situations where joint ownership might still be beneficial. For instance, parents looking to keep a family cottage within the family, or those who have a single child and wish to simplify the transfer of their estate, may find joint ownership a viable option.
What Are the Alternatives to Joint Ownership?
Rather than risking the potential pitfalls of joint ownership, our wills and estate lawyers recommend considering alternatives. These alternatives involve establishing a living trust or purchasing life insurance to cover probate fees. These options provide similar benefits without exposing the estate to the risks associated with joint ownership.
How can Our Wills and Estates lawyer help You?
Before adding an adult child as, a joint owner to any asset, it’s crucial to consider all legal, tax, and personal implications that might occur. Consulting with estate planning lawyers can help you to swim through complex waters, keeping your assets protected and your familial relationships conflict-free. If you are still without a proper will and estate plan, then connect with our experienced wills and estate lawyers today! Call us at 905-405-0199 and remember that a well-informed decision is the best defense against future unrest.
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