Owning investments jointly with adult children

Joint ownership is one of the most common ways for two or more people to hold property. This includes real estate, as well as personal property such as bank and investment accounts.

The reason investors do this is for simplicity, including the ability to transfer assets to the other owner should one die. With the deceased’s estate bypassed, there could be a probate tax savings of as much as 1.5% of the property value in some jurisdictions, including Ontario.

In the case of spouses who intend to pass property to one another on a first death, this can be a cost-effective and efficient way to transfer property. But when non-spouses are involved, complications arise.

Adding adult children

It can be problematic to add an adult child as a joint owner. In particular, income taxes may be unintentionally triggered, the property may become exposed to the child’s creditors (at least in part), and there is exposure risk if a child’s marriage breaks down.

Beyond that, there can still be significant grey areas. Merely recording title as joint ownership does not necessarily make it so. The actions and intentions of the transferor parent, and surrounding circumstances, can affect the nature and extent of the ownership interests being transferred.

These concerns most often surface after the death of the parent, when siblings or other estate beneficiaries may contest the child’s claim to ownership. An Ontario Court of Appeal case from earlier this year illustrates how this can lead to hostile and costly disputes.

Competing claims

Arthur and Hilda Sawdon held most of their bank accounts jointly. After Hilda died in 2004, Arthur was frustrated by delays obtaining the release of the one account that had been in Hilda’s name alone. To avoid this problem for his own estate, he decided to transfer his bank accounts into joint ownership with two of his five adult children. He told them all five should receive equal entitlements.

In 2006, just before the last account transfer, Arthur executed a will naming the Watch Tower Bible and Tract Society of Canada (Watch Tower), a religious charity for Jehovah’s Witnesses, as the residual beneficiary of his estate.

Arthur died in 2007, and a dispute arose over the contents of the bank accounts: about $1 million.

Watch Tower relied on the Supreme Court of Canada’s ruling in Pecore. When a parent adds an adult child as joint owner, it’s presumed that the child holds title as a trustee for the parent’s estate. Watch Tower’s sole witness was the lawyer who drafted Arthur’s will, who claimed Arthur intended the bank accounts to form part of the estate. Undisclosed to Arthur, the lawyer was an elder with the Jehovah’s Witnesses, and had acted as Watch Tower’s counsel in the past. The trial judge found his evidence neither credible nor reliable.

The appeal court distinguished the facts in Pecore, based on evidence of Arthur’s expressed intentions and his experience with and knowledge of joint ownership. From the time the account was opened the two children on title held the beneficial right of survivorship in trust for all five children, rather than there being a trust for the estate beneficiaries.

The estate trustee (who was also one of the sons on title) was awarded partial indemnity of his costs from the estate, with the balance to be recovered from Watch Tower directly. Total costs were about a quarter of a million dollars. It took almost seven years from Arthur’s death to reach this court resolution.

Doug Carroll

Tax & Estate

Doug Carroll, JD, LLM (Tax), CFP, TEP, is a tax and estate consultant in Toronto.