Thursday, August 13, 2015

Joint Tenancy as an Estate Planning Tool – Pros and Cons

Del Elgersma is a lawyer and founding partner of Beacon Law Centre with three offices, one in Victoria (Royal Oak), one in Sidney and another in Brentwood Bay, British Columbia.  Del has graciously agreed to share his publication, Joint Tenancy as an Estate Planning Tool.  As Del explains, you should weigh the pros and cons before choosing to transfer assets in joint names.  Estate planning is complex.  Consulting an estate planner and lawyer to seek advice and a clear direction is advisable. Additional publications may be found at Beacon Law Centre.

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Joint Tenancy as an Estate Planning Tool – Pros and Cons

by Del Elgersma
Estate planning means different things to different people, but most people agree that some of the goals of estate planning include:
  • Simplifying the administration of an estate
  • Minimizing probate fees
  • Ensuring that property passes to the intended person
One of the most common strategies used to achieve these goals is to own property with another person in a joint tenancy.
Joint tenancy or tenancy in common
Property owned by more than one person must be owned in one of two ways: joint tenancy or tenancy in common. In practical terms, the chief distinction between joint tenancy and tenancy in common is the right of survivorship. Only joint tenants enjoy right of survivorship.
If you own property with another person as tenants in common, on your death your interest in the property becomes part of your estate to be passed on according to your will. If you own property with another person as joint tenants, on your death your interest in the property passes to remaining joint tenant(s) by right of survivorship. It does not form part of your estate.
The law presumes that an asset (other than land) held in two or more names is owned as a joint tenancy, unless there is an indication that the owners own it in shares. So, for example, household goods, vehicles, bank accounts and investments owned by two or more persons will be presumed to be owned by them as joint tenants, unless their respective shares of the assets are specified or there is a statement that the asset is held by the owners as tenants in common.
However, in the case of land the common law presumption of joint tenancy has been altered by statute, so that land owned by two or more persons is presumed to be owned by them as tenants in common unless the title expressly states that they are joint tenants.
Right of Survivorship
Because of the right of survivorship, a joint tenancy can meet the estate planning goals of simplifying the administration of an estate, minimizing probate fees and ensuring that property passes to the intended person. It is a strategy used by the majority of married couples, who own their major assets, such as their home, as joint tenants.
The right of survivorship ensures that when the first spouse dies, these assets pass to the surviving spouse without being subject to the delays and expense of an application for probate (with a little extra planning, it is often possible to avoid probate altogether on the death of the first spouse). The right of survivorship also ensures that ownership of the assets will not be affected by claims under the Wills Variation Act, if there is a will, or by the rules for intestate distribution under the Estate Administration Act, if there is no will.
Beware of the Consequences
While joint tenancy is most common between spouses, it is becoming increasingly common between parents and children. The purpose is the same – to simplify administration of the parents’ estates and to minimize probate fees. Often the joint tenancy is created after the death of one of the parents. However, this can result in some unintended and undesirable consequences. Consider the example of a parent who has transferred her assets into a joint tenancy with one of her adult children:
Loss of control
The parent cannot later cancel the transfer if she changes her mind. As well, in the case of land, she will not be able to sell or mortgage the land unless the child also signs.
Income tax
The transfer is a disposition for income tax purposes. The 50% interest in the property transferred to the child is deemed to have been sold at its fair market value and, unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income. This could result in the parent having to pay tax even though she received no payment from the child.
In addition, one half of any future capital gains will accrue to the child. If the property is the parent’s principal residence and the child lives elsewhere, the principal residence exemption will be lost for the child’s share of any future increase in value of the home.
Property transfer tax (Applicable in certain provinces)
In the case of land, property transfer tax will be payable at the time of transfer, although there may be an exemption available if the property is the principal residence of either the parent or the child.
Exposure to creditors
The child’s interest in the property will be subject to claims by the child’s creditors. If the child is married and the property is used for a family purpose, it could be subject to claims by the child’s spouse if there is a breakdown of the child’s marriage.
The child may pass away before the parent, negating the purpose of the joint tenancy. If other children were also on title with the parent as joint tenants, on the death of the parent the asset would pass only to the surviving children, and the family of the deceased child would receive nothing.
Resulting trust
The law presumes that a joint tenant who contributed nothing toward the property holds his or her interest in trust for the contributing owner. An exception is the presumption of advancement (meaning a gift in advance of a person’s death). According to case law, the presumption of advancement applies to transfers of property from one spouse to both spouses, or from a parent to a child. However, the presumption can be rebutted. Accordingly, if the child has other siblings, they might claim that the child holds the property in trust for all of the children, while the child with title would claim that the right of survivorship applies. This could also arise if the joint tenancy resulted in property passing to children to the exclusion of a spouse, or to a spouse to the exclusion of children.
Some of the factors that may rebut the presumption of advancement and suggest that the child holds the property in trust for the parent’s estate include the following:
  • the parent was the sole owner of the property prior to the transfer
  • the property was controlled exclusively by the parent
  • the child did not report any of the income from the property on the child’s income tax return
  • the child did not receive or spend income generated from the property
  • there is evidence that the joint tenancy was created simply to avoid probate fees or to provide immediate access to the parent’s funds after death (e.g., for funeral expenses).
Another unintended result can occur if spouses in a second marriage own property together as joint tenants, and each have children from previous relationships. On the death of the first spouse, the property will pass by right of survivorship to the surviving spouse. The spouses may have had wills that provided that the property would ultimately pass to the children of both spouses, on the death of the last of them. However, the surviving spouse can change his or her will so that the property goes only to that spouse’s children, and the children of the deceased spouse would receive nothing.
Put it in Writing
To avoid the possibility of a dispute between the child and any other spouse or other children of the parent, it is a good idea to put the parent’s intention into writing. If the transfer to joint tenancy would not result in capital gains tax, or the parent is prepared to pay the tax, the parent could sign a deed of gift to confirm that beneficial ownership in the property is transferred to the parent and child as joint tenants with right of survivorship. On the parent’s death, it would be difficult for other beneficiaries to argue that the child holds the property in trust for the parent’s estate.
Alternatively, the parent could require the child to sign a declaration of trust confirming that the child does not have beneficial ownership in the property, but simply holds his or her interest in trust for the parent. In addition to reducing the possibility of a dispute between the child and the other beneficiaries of the parent’s estate, the declaration provides the parent with a greater amount of control over the property, and may prevent the deemed disposition of the property for income tax purposes (because beneficial ownership of the property remains with the parent).
However, Canada Customs and Revenue Agency (“CCRA”, formerly Revenue Canada) has suggested that the existence of a declaration of trust will not, in and by itself, be conclusive evidence that beneficial ownership of the property has not changed. It would depend on all of the circumstances.
CCRA’s position is that if legal title to an asset is transferred from a parent to the parent and a child, but beneficial ownership remains with the parent (as confirmed by the declaration of trust and other circumstances), a disposition for income tax purposes has not occurred. Having said that, CCRA pointed out that in such a situation a true joint tenancy with the child would not exist and, in its opinion, the goal of reducing probate fees would not be achieved because the property would not pass to the child by right of survivorship.
Joint tenancy can be an effective part of an estate plan, but must be used with caution. If you have questions about creating a joint tenancy or other estate planning strategies, call us first for professional advice.
For a discussion of other strategies to avoid probate and probate fees, click here.


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