There are many different way to share ownership of an asset with another person.
In a "joint tenancy" situation, two or more people own property together and if one person dies, the surviving owner(s) automatically acquires the ownership share of the deceased person. This means that no part of the property falls into the estate of a deceased joint owner until the last owner dies.
The term "joint tenancy" is used to refer to ownership of real property (house, land) but other assets may also be owned jointly in this way-joint ownership of assets other than property, such as bank accounts and investments, are called joint ownership "with right of survivorship". The legal effect of joint tenancies and joint ownership is similar and is a common form of property ownership between spouses.
Because assets that are jointly owned are not included among the assets of a joint owner on death, these assets will not be subject to estate tax (probate) during the administration of the deceased's estate. For this reason, many see this form of ownership as an effective estate tax planning strategy. However, not all joint tenancies are created equally-here are some things to think about before transferring your assets to another person.
1. You may not get out of paying estate tax after all
Property held jointly between spouses creates automatic survivorship rights; however, property owned jointly with an adult child-or any other person-will not necessarily enjoy the same status. This is because the law assumes that a transfer of property to a spouse is a gift, and that the transferring spouse intended for the surviving spouse to completely own the property after her or his death. However, the opposite is true of transfers of property to a non-spouse. In these cases, property transferred to someone other than a spouse will remain part of the transferor's estate for the purposes of calculating estate tax, unless there is a clear intention at the time of the transfer that the property was intended to be a gift to the recipient. This means that a transfer of property to someone other than a spouse simply to avoid estate tax on death, won't.
2. You may end up owing a lot more than estate tax
When you own an asset jointly with another person, you become liable for your co-owner's debts and obligations, in that the property becomes subject to the rights of creditors of all owners. If your co-owner gets into financial trouble, her or his part of the property is up for grabs by the creditors. Similarly, you also need to consider the rights of your joint owner's spouse in the property in the event of marital breakdown-you may end up sharing your home with a disgruntled ex-spouse-or worse!
3. You may find yourself out in a snowbank
Once you transfer some part of your property to another person, you lose your exclusive rights to deal with the property and will need the consent of the joint owner to sell, transfer, or mortgage your property if you need funds. Because we don't know how long we will live-or the resources that we will need during the course of our lives-it's prudent to maintain full ownership of all of your assets throughout your lifetime.
4. You may thwart your estate plan
If you have mirrored wills with a spouse, joint tenancy or ownership of your assets is often a good option and your lawyer can help you with these decisions. However, if you have organized the transfer of your assets in a different way, you may wish to consult with your lawyer, your financial planner, and your accountant to ensure that joint ownership will not result in someone unintentionally obtaining ownership of your assets on death. For instance, if you have incorporated a spousal trust into your estate plan, property held jointly with right of survivorship with your spouse will not fall into your estate. This means that you spouse will attain full ownership of the asset, rather than simply enjoying certain benefits of the property through the trust vehicle. It also means that property will not go to the beneficiary you intended it for following the death of the spouse and the termination of the spousal trust.
Joint ownership of assets can be an efficient way to organize your assets in certain circumstances and there are ways to take advantage of joint ownership while avoiding some of the pitfalls outlined here. Your lawyer and other financial experts can assist you to establish an effective estate plan, without any unintended surprises.
Please feel free to contact us with your questions related to will drafting and estate planning. We service clients from Kingston to Toronto and everywhere in between. And Ottawa too! :)
Thank you for reading!