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Saturday, October 2, 2010

Joint property not the panacea hoped for

One of the mainstays of home-made estate planning is putting the assets of the parent into joint ownership with one or more of the children. The thinking behind this action is straightforward, particularly for real estate; putting property into joint names avoids the need for probate and saves costs.

However, joint ownership is not the cure-all that people hope for. More often than not, a dozen new issues and problems are created for each problem that is overcome. Sometimes the parent never knows about the problems because they arise after the parent's death, whereas other times the problems crop up during the parent's lifetime. But make no mistake - there are almost always problems resulting from the transfer of assets into joint names without legal advice.

One of the biggest issues for the parent is the risk of losing the asset during their lifetime. The parent's risk is that the children whose names are added to the title may run into issues that risk the parent's asset. For example, if the parent has added a child or children to the title to their home, the home is at risk if the child gets divorced or is sued. The parent could lose their home.

Parents don't always realize that putting the children's names on the title is not just a convenience - they have actually transferred ownership. The intent was to allow the child to own the property after the parent passes away, but the unintended and often disastrous result is that the child owns it immediately.

Another under-considered issue is taxation. The parent passes title to the children, and there is no tax at that point because the home is the parent's principal residence. But if the children live in and own their own homes, the parent's home is not their principal residence. Therefore when the children one day sell or transfer the parent's home, they will likely have to pay tax on the transaction. So the by avoiding the payment of a probate fee, the parent has imposed a tax issue on the children.

The issue is similar when the asset in question is a bank account. Often the impetus for the transfer is that the parent wants some help with banking. The solution arrived at is that putting the parent's account into joint names with one of the children will allow that child to help the parent. Again, the intent was not to transfer immediate ownership, or to transfer ownership at all.

There are two big risks associated with a parent putting a bank account or investment into joint names with one of the kids. One is that the child legally has full access to the money and could use it all for his or her own purposes. A parent who thinks that won't happen in his or her own family is ignoring the statistics and the financial reality. Of course it doesn't happen every single time, but sadly it happens much more frequently than any of us likes to think about.

The second big risk arises after the parent passes away. The ownership of the account or investment becomes an issue. Generally speaking, when a joint owner of an asset passes away, the surviving owner now possesses that asset. So the parent passes away and the child owns the account. But if the parent only wanted help with the banking, did he or she actually intend to give ownership of the account to the child? This may not sit well with the other children, who may feel that the child took advantage of the parent. It may disrupt the parent's stated goal of treating all children equally. Often, this ends up in court.

So what can a parent do to avoid these issues?

1.  Keep the big picture in mind. Do not simply transfer an asset without realizing the ripple effect it will have on estate planning, probate, taxation and family dynamics.

2.  Get legal advice. The bill for talking to a lawyer for an hour or two will be considerably less than the legal fees that might be paid to sort out a problem in court.

3.  Know what alternatives are available to achieve your goals. For example, use an Enduring Power of Attorney to allow children to help you with the banking.

4.  Get the facts. People in Alberta are often shocked to realize that they have risked a half-million dollar property to save a probate fee that cannot exceed $400. Find out from a reliable source what costs, fees and taxes will apply in your area.

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