Don’t take these shortcuts

Last time, I reviewed three of the most common estate planning mistakes and their consequences (Read: What not to do in estate planning).

The three mistakes are: failing to prepare a will; failing to keep your will up-to-date; and the DIY will. Unfortunately, the mistakes don’t end there.

Here are two other common mistakes that help keep estate litigators in business and underscore the value of working with an estate planning expert: unwise use of joint tenancies, and keeping your will too simple.

1. The perils of joint tenancies

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

Upon the death of a tenant-incommon, their share forms part of their estate to be distributed under their will or on intestacy.

This may be the preferred ownership arrangement if parents bequeath a cottage to their children in the hopes of keeping it in the family.

The idea is the children will in turn bequeath their shares to their children in their wills.

5 risks to holding property jointly

• If your client puts property into the name of one of her children, and that child claims his mother wanted him to be the sole owner of the property, there’s bound to be a fight when she dies. The siblings will say their mother made the arrangement for convenience and their brother is merely holding that property in trust for the estate. expect a costly legal battle.

• The gifted interest in the property can’t be recovered without the consent of the other owner(s). A separation from the spouse or an estrangement from one or more of the children could leave the client with a bad case of donor’s remorse.

• The transfer can have immediate negative tax consequences by triggering capital gains.

• If any of the joint owners gets into financial trouble or a divorce-related property fight (or any other legal dispute), the property will be at risk.

• If the property has the potential to generate significant income or capital gains after the client dies, a testamentary trust may be a better option. These trusts are created under a taxpayer’s will and are taxable at graduated rates. This opens the door to income-splitting that, over time, can generate enough income tax savings to dwarf the probate taxes.

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 ultimately become the sole owner, with power to deal with the cottage as they please. Such an arbitrary and unpredictable cottage succession plan is generally not what the parents intend.

JTWROS has traditionally been the preferred asset ownership arrangement between spouses in a first marriage situation. 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 the ultimate goal is to bequeath the asset to someone other than the spouse, or if there are special considerations such as creditor issues or a spouse with special needs, this arrangement may not work.

JTWROS and spousal trusts are mutually exclusive and, as such, the former arrangement may not be advisable in subsequent marriage situations.

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 les 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 estates and, most importantly, are avoiding/reducing probate (Estate Administration Tax, in Ontario) and perhaps even the costs of preparing a will. But JTWROS may end up complicating matters and increasing both the complexity and costs of administering the estate.

Probate fee planning is often a significant concern in jurisdictions with relatively high rates (Ontario and B.C. rates, at 1.5% and 1.4%, respectively, are the highest). Although it may be possible to reduce/eliminate probate fees using JTWROS, this potential advantage must be weighed against the many disadvantages.

The disadvantages (which depend on a number of factors, including the type of property involved) may include:

• 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 may arise due to disagreement over the disposition of the jointly held property at death.

There have been a number of court cases where 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 (whether or not it ends up in court), the intended savings can be quickly eroded. Add to that the costs of the resultant disharmony in the family.

Bottom line: JTWROS is not generally a viable substitute for proper succession planning. To ensure assets are passed on as intended at death and properly protected during lifetime, clients should be encouraged to obtain proper estate planning advice and ensure they prepare—and update—both their wills and Powers of Attorney.

2. Keeping it too simple

I’ve reviewed far too many wills where not enough was said to truly reflect the testator’s intentions. For instance, say an Ontario will contains the following clause:

To pay $10,000 to each of my sister Elizabeth and my friend Catherine.

If both Elizabeth and Catherine are alive on the testator’s death, each will receive $10,000. If Elizabeth predeceases the testator, her $10,000 will be distributed to her spouse and/or issue. If Catherine predeceases the testator, her share lapses and will be added to the residue of the estate.

Why are the two legacies treated differently? Because that’s what the applicable law, Ontario’s Succession Law Reform Act, says. Is this what the testator intended? Maybe. Maybe not.

A well-drafted will should clearly express all intentions. In this case, the drafting lawyer should confirm what the testator would want to have happen should Elizabeth and/or Catherine predecease her. If the testator does not want anyone other than Elizabeth or Catherine to get the money, the clause should read:

To pay $10,000 to my sister Elizabeth, if she survives me. To pay $10,000 to my friend Catherine, if she survives me.

If the testator would like someone else to get the money should Catherine predecease her, the clause should read:

To pay $10,000 to my sister Elizabeth if she survives me. To pay $10,000 to my friend Catherine, if she survives me. If Catherine fails to survive me, to pay $10,000 to my friend Laura, if she survives me.

(Had the initial clause omitted the word “each,” there would be even more confusion as to what was intended. Do Elizabeth and Catherine share $10,000 or do they each get $10,000? What if only one is alive at the testator’s death? Many a court case has revolved around the meaning of a single word or sentence.)

A well-drafted will is clear on its face and avoids the need to turn to the law to provide an interpretation that may not reflect the testator’s true intentions.

The disposition of personal property is another area where simple wills often fall short.

If a testator wants each surviving niece and nephew to be able to select a special item of personal property or wants her oldest daughter to get the grand piano, but only if she pays to have it shipped to her, the will needs to say that.

A two-page will that says to “divide my estate equally among my nieces and nephews” won’t do it. A clause that fails to specify whether the beneficiary or the estate is responsible for the cost of delivering personal property may result in a costly resort to the applicable law and bad feelings among all concerned.

An experienced estate planner understands the importance of ascertaining and clearly stating a testator’s intentions. When dealing with the disposition of personal property, testators have a few options. They may:

• bequeath particular items in their wills (the list can range from very short to very long)
• detail schemes of distribution (e.g., “to divide my remaining personal property among those of my children alive at my death, in such manner as they may agree upon, or, failing agreement, in such manner as my Trustees in their absolute discretion consider equitable”)
• prepare precatory (non-binding) memoranda detailing their wishes
• prepare binding memoranda

As with many estate-planning considerations, there is no one right way. The best option depends on the personal circumstances of the testator and their intentions with respect to the disposition of their property. An experienced estate planner will appreciate the merits of each method and make appropriate recommendations to the testator.

Bottom line: While an inexpensive, simple will may save your clients money in the short run, such savings may be at the expense of their true intentions or result in increased costs and bad feelings in future.

Elaine Blades is director of fiduciary services at Scotia Private Client Group.