Joint tenancy and your estate plan

Estate planning can be a lot of work, but one way to minimize the labor is to make sure you get it right the first time. Part of that means making sure using a joint tenancy actually makes sense.

There are two basic types of joint ownership: tenancy-in-common and joint tenancy with right of survivorship (JTWROS). The latter isn’t recognized in Quebec. Tenants-in-common share a specified portion of ownership rights in property. Their shares may be equal or unequal.

Upon your death as a tenant-in-common, your share forms part of your estate to be distributed under your will or on intestacy.

This sort of arrangement is used in situations such as when parents bequeath a cottage to their children, with the idea being that the children will in turn leave their shares to their children in their wills.

In a JTWROS, two or more people each own an undivided interest in the whole property. Joint tenants share equal ownership and have equal rights to keep or dispose of the property. On the death of a joint owner, the property goes to the surviving joint tenant or tenants, not to the deceased joint owner’s estate.

Going back to the cottage example, if the parents transferred their interest to their children as joint tenants, the last to die of the children would be the sole owner, with power to deal with the cottage as they please.

JTWROS has traditionally been the preferred arrangement for a first marriage. Such a structure often simplifies the administration on the death of the first spouse, with the asset (family home, cottage, bank/investment accounts) automatically going to the surviving joint tenant.

But if your ultimate goal is to leave the asset to someone other than your spouse, or if there are special considerations such as creditor issues or a spouse with special needs, this arrangement may not work.

Over the past several years, certain jurisdictions have witnessed a new trend in JTWROS—an increase in the incidence of this ownership arrangement between parents and adult children. This typically follows the death of the first parent. The widow or widower may then make assets joint with one or more children.

The family often sees this as less troublesome than acting under a Power of Attorney for property where the parent would benefit from assistance in managing their financial affairs.

Parents are pleased because they believe they’ve simplified the future administration of their estate and, most importantly, are avoiding/reducing probate (Estate Administration Tax in Ontario) and maybe the costs of preparing a will. But JTWROS can end up complicating things, ultimately increasing both the complexity and costs of administering the estate.

Although it may be possible to reduce/eliminate high probate fees using JTWROS, that advantage has some serious downsides:

• accelerated realization of capital gains
• loss of principal residence exemption
• exposure of asset to creditors (including the spouse) of the new joint owner
• inability to undo the transfer
• abuse of arrangement by new joint owner
• increased estate settlement costs

Increased estate settlement costs can arise due to disagreement over the disposition of the jointly held property at death.

There have been a number of court cases where the surviving joint owners’ children claim the recently deceased parent wanted them to get the assets.

The non-joint owner siblings object, claiming mom or dad really wanted the asset to be shared by all children.

If the matter is referred to an estate litigator, those extra savings can quickly disappear. Beyond the financial impact, there can be serious personal fallout as well.

Bottom line: JTWROS isn’t an easy substitute for proper succession planning.

The only way to ensure your assets are passed on as you intend and properly protected during your lifetime is proper estate planning, including an updated will and Powers of Attorney.