Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
A common question we receive is, “Should I transfer the ownership of my house or investment account into joint ownership with my children to avoid probate fees?”
This type of ownership is called joint tenancy with survivorship. This means both parties have equal rights to the asset. When one dies, the other receives their share of the property or asset in addition to their own without any probate fees. To accomplish this, you are gifting 50% of the asset to your child.
The reason people wish to avoid probate fees (or the Estate Administration Tax) is the fee is 1.5% of the asset’s value.
My initial response is that everyone should be very careful when considering making any asset joint ownership with anyone other than their spouse.
The reason is it can create unintended results, such as:
- Immediate tax issues. If you change an investment account or a cottage into joint ownership with your child, it may have immediate tax consequences as it has to be reported as a disposition on your income tax return. Capital gains taxes may be payable.
- Creditors and Marital Property. With any asset/property you make joint ownership, the other owners’ creditors may have access to it, and it may become part of their matrimonial property.
- Principal Residence Exemption. If you make your home joint ownership with your child, they may end up with two homes, and only one home at a time is eligible for the principal residence exemption. (tax free gains)
- Loss of Control: You may potentially lose control as you do not have 100% say or direction in what happens to the property/asset since you don’t own it all.
- Conflict with the Estate Plan. The change of any asset ownership to joint will alter the final disposition of the asset, and this may not follow your overall estate plan or intentions.
- Alter the Elder Care Plan. Often the home is an asset that is earmarked for the elder care plan, either to be sold to fund living in a retirement facility, or to set up a line of credit to pay for extra health care expenses. Making your home joint ownership with your child may make this process more difficult.
If you wish to avoid probate fees, any strategy needs to be considered in the context of the entire estate and elder care plan.
If you are over the age of 65, you may want to review an alternative strategy to avoid probate fees. Please read an Alter Ego or Joint Partner Trust.
Speak to your lawyer, accountant, and financial planner prior to making any changes.
Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
“So, with any of the strategies, they must be reviewed carefully with your lawyer, accountant, and financial advisor to make sure it makes sense and accomplishes what you intended. You must be concerned about unintended results, which means attempting to save on probate fees that cause other problems.”
“What’s an example of unintended results?” Alice asked.
“I think I can answer that,” Sally said as she took a sip of her drink. “My lawyer friend mentioned that while you want to minimize probate and estate fees, you have to be careful of unintended circumstances, as Uncle Wayne said. For example, he has seen that some people put their homes in joint ownership with their adult children to avoid probate fees, but this can cause problems. Since the child then owns part of the home, the child’s creditors could have access to the property, and the child may also end up with two homes, and only one can be a principal residence, which could cause tax problems.”
“Very good point, Sally. This is why you have to include your lawyer and accountant when making and implementing an estate plan,” Uncle Wayne said with a smile.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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