Many British Columbians or persons with assets in British Columbia place a strong emphasis on probate avoidance planning in hopes that it will simplify the administration of their estate and reduce probate fees. A common probate avoidance planning strategy involves transferring assets — such as real estate, bank accounts, or investments — into joint tenancy with another person. The idea seems simple: when the original owner dies, the asset passes directly to the surviving joint owner, avoiding the need to obtain probate. But while this approach may sound appealing, it can become thwarted by unexpected and unintended legal, tax, and family complications.
This article explains what joint tenancy means under British Columbia law, why adding someone as a joint tenant can be risky, and how the law can defeat plans to avoid probate if not properly structured and documented. This article will focus on considerations with respect to bank and investment accounts; however the same principles will apply to real estate. While the concepts apply to any person in respect to another person as a joint owner, for the purposes of this article, we will illustrate this concept using a parent and an adult child; as that is the most common circumstances in which these situations arise.
What Is Joint Tenancy?
Joint tenancy is a form of co-ownership, whose defining feature is the right of survivorship — when one owner dies, their interest automatically transfers to the surviving joint tenant, bypassing the deceased’s estate and, therefore avoiding probate. Joint tenancy is often used between spouses as a convenient way to ensure property passes automatically to the survivor. However, problems often arise when a parent adds an adult child as a joint tenant purely for probate avoidance purposes and the parties haven’t properly documented what their intentions were.
Following the landmark 2007 decision of the Supreme Court of Canada in the case of Pecore v Pecore, the Courts have determined that there are different types of joint tenancy and that a right of survivorship wouldn’t accompany every form of joint tenancy. The Courts distinguished a true joint tenancy with right of survivorship from:
- a joint tenancy where only one joint owner has a beneficial interest while they are alive and when they die, the other owner has a right of survivorship;
- a joint tenancy where only one joint owner has a beneficial interest while they are alive and when they die, the other owner holds the asset in trust for the deceased owner’s estate; and
- a joint tenancy where only one joint owner has a beneficial interest while they are alive and when they die, the other owner holds the asset in trust for a pre-agreed to group of beneficiaries.
These decisions have created four different types of joint tenancy and a plethora of confusion for people who continue to assume that all joint tenancies carry the right of survivorship.
The Presumption of Resulting Trust in British Columbia
In Pecore the Courts dealt with a case where an account belonging to a parent was transferred into joint tenancy with the parent’s daughter. The Court found that it would be dangerous to presume a gift each time a parent put a child’s name on title to an asset when the reality is that a child is holding an asset in trust for an ageing parent to facilitate the management of such parent’s affairs.[1] Thus, the presumption of resulting trust was born. Following Pecore, the British Columbia courts have consistently applied the presumption of resulting trust to joint ownership arrangements between parents and adult independent children.
In a post-Pecore world this means joint accounts between a parent and an adult independent child will be presumed to be held by the child in trust for the parent’s estate and such accounts will be subject to probate — effectively defeating the purpose of the transfer — unless the child can prove on a balance of probabilities that the parent intended a true gift.
The crux of rebutting the presumption of resulting trust is in the intention of the parent at the time that the joint tenancy transfer was made as to whether the asset was intended to be an immediate gift, a gift of the right of survivorship or to be held in trust to allow for assistance with managing such asset. Best practice is to document intention at the time that the transfer was made. It is best to obtain legal advice prior to undertaking any transfers of assets into joint names to ensure that the true intent of the parties will be carried out and properly documented to avoid unnecessary litigation upon a parent’s passing.
Why Adding a Child as a Joint Tenant Can Be Problematic
While the motivation to avoid probate is understandable, using joint tenancy with children as an estate planning shortcut can lead to serious unintended consequences, if the parent doesn’t understand some of the implications or the parent’s intention is not fully documented in consultation with an estate planning lawyer.
[1] Loss of Control and Exposure to Risk
Once a child is added as a joint owner, the parent no longer has sole control over the asset, as the asset is now legally shared between them. This can:
- Limit the parent’s ability to sell, mortgage, or otherwise deal with the asset, as the child must now agree and sign documents for any dealings with the asset.
- Expose the asset to the child’s creditors, including divorces, or bankruptcy proceedings.
- Create confusion about who truly owns the asset during the parent’s lifetime.
[2] Potential Tax Consequences
Adding a child to asset ownership can trigger capital gains tax if there is an unrealized gain on the asset immediately prior to transfer. To the extent the assets are real estate and the principal residence of the parent, the principal residence exemption may be lost respecting the portion now held by the child.
[3] Family Disputes and Unclear Intentions
When only one child is added as a joint owner, there may be uncertainty about which form of joint tenancy applies. Without a clear indication of which joint tenancy applies, after the parent’s death, the other siblings may dispute whether the asset was intended to belong solely to the joint tenant child or to be shared among all beneficiaries under the will. These disputes frequently lead to costly litigation.
[4] Presumption of Resulting Trust
The above-discussed presumption of resulting trust means that a person holding joint title to a particular asset is doing so in trust for the person who put the asset into joint names and is typically seen in cases of gratuitous transfers (i.e. gifts). The reality of this presumption is that when a parent adds a child onto a bank or an investment account, on their death the child is presumed to be holding that account in trust for the estate. The account will need to go through the probate and be distributed in accordance with the parent’s Will. The person holding title to a particular asset can overturn this presumption and prove the transfer was meant to be a gift through appropriate documentation or evidence.
[5] Possibility of Bare Trust Reporting
The federal government continues to assess how they want to implement bare trust tax return reporting, which has again been deferred in the recent federal budget. If the federal government implements what many professionals expect them to do, then a joint tenancy of a parent and a child for a bank or investment account could fall within the scope of bare trust reporting, which will require a parent to file a bare trust tax return reporting the joint tenancy arrangement. The cost of these trust tax returns and reporting could add significant annual costs to using joint tenancy as a probate avoidance strategy.
[6] Powers of Attorney
It is a common misunderstanding that putting assets into joint names alleviates the need for a power of attorney. If a joint owner has lost capacity, the other joint owner does not have any automatic right to administer the interest held by the incapacitated joint owner, and a power of attorney will be needed to administer the asset (or failing same a court order appointing a committee).
Other Probate Avoidance Planning Options in British Columbia
While avoiding probate is a valid concern, joint tenancy with children is often not the best estate planning tool to achieve it. Other reliable and flexible strategies may include:
- Considering the use of multiple wills (for example, separating business and personal assets);
- Establishing an alter ego or joint spousal/partner trust to hold and distribute assets outside the estate for persons that are 65 years of age or older;
- Designating beneficiaries on RRSPs, RRIFs, TFSAs, and insurance policies; and
- Consulting an estate planning lawyer in British Columbia to document your true intentions and minimize risk.
Conclusion
Transferring accounts into joint names with children to avoid probate may seem like a simple solution, but it can have serious legal and financial repercussions if not done properly. In many cases, these poorly documented arrangements are later challenged under the presumption of resulting trust, bringing the assets back into the estate and undoing any perceived benefits. Before taking this step, it is essential to seek advice from an experienced estate planning lawyer in British Columbia, who can help you structure your estate plan effectively and evaluate whether the perceived benefits of using joint tenant ownership to avoid probate is the best course of action.
[1] Pecore, supra note 3, at paragraph 24.