One of the more commonly used estate planning tools to avoid or reduce Estate Administration Tax is joint ownership or a joint bank account. When two people own an asset jointly, and one owner dies, the remaining joint owner takes ownership of the entire asset by right of survivorship, thus causing the asset to pass entirely outside of the estate of the deceased person. However, there are advantages and drawbacks to this tool. While the convenience and tax savings may be beneficial, once an asset is owned jointly with another person, you may lose control of that asset in a substantial way.
In Canada, assets held jointly between a parent and an adult child are treated in an particular way, as per the Supreme Court of Canada's decision in Pecore v. Pecore, 2007 SCC 17. If a parent places an asset in joint tenancy with an adult child, when the parent dies, the presumption of resulting trust will apply, meaning that the asset will revert back to the estate of the parent. This presumption can be rebutted if it can be shown that the parent intended the adult child to take the asset as a gift. One such way of indicating this type of intention is by using a deed of gift, but anything expressed orally or in writing is helpful in determining the true intention of the parent and ensuring that the gift will be enforceable. This will help to mitigate the risk of a beneficiary of the estate taking the position that that the child's name was added to the account only for the purpose of allowing the child to help the aging parent with his or her banking, and not with the intention that the child should inherit the account on the parent's death.
In the Pecore case, the aging father set up a joint account with his adult daughter, Paula, for the purpose of avoiding taxes on his death, as well as providing for her. The father retained control of the bank account and continued to use it during his lifetime, although Paula did have access to the account and did make some withdrawals. The court had to consider evidence of the father’s intention and ultimately found that he had the intention to gift her the right of survivorship over the joint account because of the following:
Paula and her father had a very close relationship, and consequently he preferred her over her other siblings;
Paula had suffered financial hardships and her father had helped support her over many years, which is consistent with an intention to gift;
The father made some statements while drafting his will, subsequent to setting up the joint account, to the effect that he understood that the assets in the joint account would not form part of the estate, and instead would pass directly to Paula through right of survivorship. The assets in the joint account made up a substantial portion of his estate, and thus he would have at least discussed them with his lawyer when drafting his will if he thought they were part of his estate.
In the more recent case of Mroz v Mroz, 2015 ONCA 171, the Court of Appeal of Ontario considered the transfer of property from a parent into joint tenancy with her adult daughter, Helen. The mother in this case, however, stipulated that after her death, Helen would take ownership of the mother’s share of the property, but only if she then provided the sum of $70,000 each to two other beneficiaries. Helen did not do so. The court found that the mother did not intend for the property to pass to Helen by right of survivorship on her death because of the following:
In her will, the mother referred to Helen taking her own share of the property, which is inconsistent with an intention to gift the whole of the property by survivorship;
The property made up the large majority of the mother’s assets at her death. As she was financially knowledgeable, she would have known that the property would be needed to fund some other bequests in her will, and thus must have intended it to form part of her estate;
Helen was obligated to pay the sum of $70,000 to each of the two other beneficiaries. Since, as per the mother’s instructions, the property was intended to be the source of the funds for these bequests, it must have been part of the mother’s estate, and thus could not have passed to Helen via survivorship.
Many people are familiar with the concept of joint ownership and the right of survivorship. However, the importance of properly documenting your intention in transferring your assets into joint ownership cannot be emphasized enough. If you have considered using joint ownership as an estate planning tool, ensure that you have good advice in order to make your gift enforceable.
Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.