Last week we discussed the limits of Joint Tenancy, a long-established and the most common way that couples or co-owners hold title to property. This tool is often used as an estate planning measure when a parent transfers title to a child as a Joint Tenant so the property automatically passes to the child [or it could be any other individual] when the person, usually a parent, passes away. This is done to save probate fees. However, it is only to be done very carefully to avoid the minefield of issues that can arise once the transfer is made. Read below for the heart of the problems.
1. Probate Savings can be Taxed away.
Adding a child to your title saves on probate tax — around $15,000 plus legal fees on a $1M Toronto home — but it can easily result in capital gains tax, that far exceed those savings. If the home isn’t a principal residence, that is, if the son or daughter does not actually live in the property, depending on the amount of appreciation between the transfer and when the parent passes, this can trigger a taxable gain that wipes out any benefit.
2. You Lose Control of Your Home.
Once a child or anyone who is added to title becomes a legal owner of the property, that property can become their asset and can therefore be attached by creditors who could come after the home and spouses who would claim an interest in the property under the Family Law Act, something possibly not intended or wanted by the parent. Also, once someone is a registered owner, his or her consent will be required to sell, refinance or change the title to the property.
3. To repeat from last week, it takes just ONE party to terminate a joint tenancy.
The right of survivorship depends on the joint tenancy continuing. However, either joint tenant can unilaterally terminate the joint tenancy and end the right of survivorship at any time.
Practical Tips for Owners and Estate Planners:
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Before You Transfer: Always consult a lawyer and an accountant to fully understand the tax consequences of the transfer before proceeding.
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Understand the risks of Joint Tenancy: Know that it can be severed unilaterally, affecting inheritance rights and it may subject the home to claims by unintended third parties.
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Look at your Will and Estate Plan: This may be enough and the better way to go.
Dig Deeper:
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