Planned Giving: Probate Saving Strategies: Tips & Traps Part I – Joint Ownership
Probate of a Will isn’t legally mandatory but is usually needed to give third party financial institutions and government agencies holding assets the judicial confirmation that the Will is valid and that the Executor is authorized to act in the Estate. When a Will is submitted to the Court for probate, Estate Administration Tax (“probate fees”) is charged in Ontario at 0.5% on the first $50,000 and 1.5% on the balance of the Estate.
One of the more popular strategies for reducing probate fees is holding of assets in joint ownership. Holding assets such as a home, cottage, bank account or investment account with another person reduces probate fees since joint assets pass automatically to the surviving joint owner outside of the Will and are generally not subject to probate fees. A home in the name of one spouse having a value of $1 Million will trigger $15,000 in probate fees on the owner’s death which can be saved if transferred into the joint names of the spouses.
There may however be repercussions and complications to joint ownership which far outweigh the savings of probate fees including:
- Loss of control of the property. The joint owner now has a say in what happens to the asset.
- Adverse tax consequences. If the asset has increased in value, tax may have to be paid on any capital gains on half of the assets when the asset is transferred into joint ownership. This is because a transfer is considered a sale at fair market value for tax purposes.
- A change in the treatment of the property for family law purposes. The original owner on separation does not get the benefit of the exclusive growth after the date of separation in the value of the property since it is now owned by both parties.
- Un-anticipated claims of the spouse of the new joint owner. If a half-ownership of an asset is transferred to an adult child and they have a spouse who they later separate from, the child’s spouse could have a claim on your child’s half of the asset.
- If the joint owner has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by their creditors.
- The transfer in some cases doesn’t work to save on probate fees. In a transfer from a parent to an adult child, the presumption is that the child holds title on a resulting trust. The child must prove the intention was to make a gift [see Pecore v. Pecore (2007) SCC 17 and Madsen Estate v. Saylor (2007) SCC 18]. Assets held in trust are included in calculating probate fees so no savings results. Such a transfer may also result in expensive litigation to determine the parent’s intention after death.
Joint ownership arrangements can be complicated. Get expert legal and tax advice before entering into one of these arrangements.
Mary Wahbi, JD, TEP, is a partner at Fogler Rubinoff LLP. She is a long time Wellspring volunteer and a member of the Planned Giving Advisory Committee of Wellspring. Her practice focuses on estate planning, estate administration, corporate reorganizations and business succession planning. Mary can be reached at firstname.lastname@example.org, or (416) 864-7629.
To learn more about making a planned gift, click here.