By Kristi Collins
One very common source of estate litigation today stems from a key misunderstanding about how the law treats assets held jointly by elderly parents and their adult children.
In this Part 1, I briefly define “joint tenancy with right of survivorship” and explain the difference in the way the law treats joint tenancy of married spouses as opposed to joint tenancy between parents and their adult children. The difference between joint tenancy and beneficiary designations is also explored.
Joint Tenancy with Right of Survivorship
Most people understand that when assets are held in “joint tenancy with right of survivorship”, this means that each owner owns an undivided 100% of the asset, and when one of the joint owners dies, the surviving owner(s) will automatically take 100% ownership in their own name. This is different than a “tenancy in common”, where each owner owns their own percentage (often 50% each) of an asset. When one dies, 50% ownership will go to his/her estate and the other 50% ownership will remain with the survivor.
Married spouses often hold their real property, bank accounts and investments as joint tenants and expect that when one of them dies, the other will automatically take 100% ownership of the asset without the asset forming part of the estate. This avoids the need to administer an estate and/or to pay Estate Administration Tax (more commonly known as ‘probate fees’). What they may not realize is that this only goes so smoothly because family law legislation specifically provides a legal presumption that married spouses who hold their assets in joint tenancy intend for this transfer outside of the estate to occur.
In the same way, many aging parents are transferring their homes and/or their accounts to the joint names of themselves and their adult children during their lifetimes, thinking that this will allow the assets to go to the children after death without having to pay probate fees. THIS IS NOT THE LAW.
The Supreme Court of Canada has made clear that when assets are held jointly by parents and their adult children, the law in fact presumes the OPPOSITE: specifically, the law presumes that any assets gratuitously transferred by the parent into joint ownership with their adult child are intended to form part of the parent’s estate after death, to be administered in accordance with their will.
Lawyers frequently hear: “but our bank/financial planner told us that ownership of assets held in joint tenancy passes entirely to the survivor.” Technically, that is correct – this is the meaning of joint tenancy with right of survivorship. Nonetheless, the law presumes that adult children hold assets jointly with their parents in a “resulting trust” for the benefit of their parent’s estate. (Note that joint assets of parents and their minor children are treated differently than those discussed here.)
One reason why the law does this is because it can sometimes be unclear whether a parent added their adult child to a bank account or home as a joint tenant for the parent’s own convenience or whether it truly was intended to pass on their death to that child.
The following is a common scenario that illustrates the difference in the way the law treats joint ownership of married spouses as opposed to joint ownership of parents and their adult children:
Dad and Mom have three adult children (let’s call them “Al”, “Bob”, and “Charlie”). Dad and Mom own a house in joint tenancy. Dad and Mom also own a joint bank account. Dad solely owns a classic car. Mom solely owns various items of jewellery. Dad and Mom have made wills that each leave their estate to the other or, if the other predeceases them, to be divided evenly between their three children.
Dad dies. Mom takes the house and joint account by right of survivorship, outside of the estate. Mom takes the classic car through the estate in accordance with Dad’s will.
Over the next few years, Mom requires more assistance at the house and in managing her finances. Al begins to assist Mom. He may or may not move in with her. He may or may not be appointed under a Power of Attorney. (None of these facts change the legal presumption.) In any event, Mom decides to add Al as a joint tenant on title to her home and as a joint holder on her bank account. CONTINUED ONLINE
Then Mom dies. Very often the “Al” in this scenario believes that the house and the joint account belong to him. Maybe Mom had even thought this would be the result. But this is incorrect. The law presumes that Al holds the home and bank account in a resulting trust for Mom’s estate. In fact, the home, the bank account, the car and the jewellery (and anything else Mom owned) fall into her estate which, after probate fees are paid, will be distributed equally between Al and his two brothers in accordance with Mom’s will. If Al refuses to accept this, then Bob and Charlie will likely sue, as their shares in the estate would be minimal without the house and the joint account being included in Mom’s estate.
There is still hope for parents who wish to use joint tenancy as a tool for estate planning. The presumption of a resulting trust can be rebutted by evidence that the parent intended that the surviving child would take the joint asset and it would not fall into the estate.
In order to avoid litigation over jointly-held assets, parents should clearly document their intentions in placing assets in joint ownership with their adult children. If litigation ensues, a court will look at all the evidence on all sides to try to determine what the parent’s true intentions were. This will include a consideration of any memoranda, letters or other documents demonstrating intent, the wording of the will, witnesses who may have discussed the parent’s intentions, and how the parent and child treated the assets during the parent’s lifetime (for example, were the assets solely used for the parent’s benefit until death? How were the joint assets reported on the parent’s tax returns?). The evidence of the surviving child will not be sufficient on its own. In other words, the court will not just take Al’s word for it that Mom intended the house and bank accounts to go to him.
To avoid inconsistent evidence, parents should document their intentions with respect to joint assets with the assistance of legal counsel as part of their estate planning.
The use of beneficiary designations on insurance, RRSPs/RRIFs and other investments is another way to transfer your assets after death outside of your estate (thereby avoiding probate fees on those assets). The legal presumption with beneficiary designations is that the asset is intended to go to the named beneficiary. Generally, you do not need to worry about separately documenting your intentions when you name a spouse, an adult child or anyone else as a surviving beneficiary.
There is therefore a key difference in legal presumptions between naming an adult child as a joint holder of your investment accounts rather than naming the adult child as a surviving beneficiary of those accounts.
Similarly, there is a key difference between naming an individual as beneficiary of your life insurance rather than naming your estate as beneficiary.
Even where you use and document joint ownership and beneficiary designations correctly, you should be aware that the law provides that these can be “clawed back” to your estate if you do not adequately provide for one of your dependents in your will. This issue will be the subject of Part 2 of this series.
In conclusion, your intentions in planning your estate may not be carried out if they are based on a misunderstanding of the law. You should thoroughly discuss your plans with respect to jointly-held assets and beneficiary designations with your legal and financial advisors as part of your estate planning. Careful planning now will minimize the risk that your assets will fall into estate litigation later. If such transfers have already taken place, you should speak with your lawyer to sufficiently document your intentions.
Kristi Collins is an Associate at Lancaster, Brooks & Welch LLP and she may be contact for discussion on Estate Litigation matters at 905-641-1551