The joint tenancy trap: Joint names no longer ensure ownership

Joint ownership is nothing new. In fact, it’s as common a practice as naming beneficiaries in registered plans and life insurance. Still, in this day and age, the joint tenancy snafu can be one of the biggest traps in personal financial planning.

In my practice, I get a lot of questions from financial advisors across the country on the issue of joint ownership. For example, one advisor recently asked me to comment on a case involving his client, an elderly man with seven children, in which the father’s will had been updated, essentially leaving $3 million worth of investments to one daughter. The advisor’s client describes the other siblings as “vultures.”

The advisor asked our team what the risk of litigation would be if the father passed away and the other siblings got nothing — and if there’d be anything the father could do to prevent litigation from being successful if his absolute intention was to leave the $3 million exclusively to the one daughter.

Here’s how we responded:

• the risk of litigation is very high; and
• yes, there are steps the father can take to bulletproof his intentions with this property.

So let’s go into some depth on Joint With Right of Survivorship (JWROS) clauses, starting with some points about what joint ownership is, and how it works. Your clients may already own property jointly or may be interested in transferring property into joint tenancy as a method of passing the wealth outside the estate. Most types of property — real estate, bank accounts, bonds, securities, mutual funds, company shares, etc. — can be jointly owned, and the laws of JWROS apply to every province of Canada, except Quebec.

Generally, when property is registered in the name of two or more persons, as joint tenants (as opposed to Tenancy in Common) on the death of the first, the survivor automatically has a right to the entire property. This is referred to as The Right of Survivorship aspect of JWROS assets and, typically, the surviving joint tenant(s) need only produce a death certificate to acquire the whole property.

So why should financial advisors recommend putting assets into JWROS? The convenience of holding assets jointly has led to an increasing use of joint accounts as a means to transfer wealth between partners, or between parents and children. This is done for a variety of financial management or estate-planning purposes, most notably for convenience or to reduce probate fees. You may advise a client to hold an asset jointly with one of his or her children for reasons of convenience or, for example, because he needs to have a person with authority to write cheques, make deposits and complete transactions in an investment account.

By doing that, it’s possible to avoid some of the disadvantages of joint ownership, including the deemed disposition rules of the Income Tax Act (see “Beware the Pros and Cons,” page 26). And, depending on the province of residence, holding assets JWROS will likely reduce probate fees on the estate because of the right of survivorship aspect of the joint account.

If your client wishes to leave an asset to a child, then a joint account is a good choice because it acts as a separate will dealing only with that specific asset. In such cases, the asset will go directly to the child who is the joint holder when the client passes away.

Whether an asset is registered JWROS for reasons of convenience or for purposes of a gift, it’s critical to understand the distinction between the registered owner (the person who is registered on title) and the beneficial owner (the actual owner).

Ownership distinctions

It’s well understood that common law recognizes a distinction between legal and beneficial ownership. The beneficial (actual) owner of a property is generally recognized as the real owner of property even though it is registered in someone else’s name.

In addition to being concerned about how legal title to the property is registered, advisors should ask about any beneficial interests in the property. Unfortunately, in some situations, the survivor only has the right to the legal title of the entire property, while the beneficial title may reside with the estate of the first to die on the basis of resulting trust. For example, if a grandmother transfers her bank account into joint names with her granddaughter, then, upon the grandmother’s death, the granddaughter may take the position that the account passes to her by right of survivorship.

However, the executor of the grandmother’s will may take the position the account was a joint account for convenience only and may argue the grandmother had no intention of passing the beneficial interest on her death to her granddaughter. If the executor’s argument prevails, the granddaughter will be found to be holding the joint account on resulting trust for the estate of her grandmother, rather than for herself.

The Supreme Court weighs in

The JWROS process seems straightforward, and typically doesn’t give rise to many issues between spouses and partners. But, unfortunately, transferring property into joint ownership with a child is often fraught with hidden peril. Warn clients that putting assets into the names of children during their lifetimes can create some very un-intended, and unhappy, consequences.

This is because, where only one of the joint owners has funded the account and he or she dies first, a question arises as to whether he or she intended to have the funds go to the other joint owner alone or be distributed according to the terms of his or her will.

Estate planners often neglect to advise their clients to make their intentions clear from the outset, and in a number of cases this has led to disputes between beneficiaries that are costly to families from both a financial and emotional perspective. That’s exactly what happened with two cases that reached the Supreme Court of Canada (SC) this past spring. The SC rarely agrees to hear estate cases, and both of those recently heard involved an elderly parent who held joint accounts with one of his or her children, and litigation ensued after the parents died.

In one case, Pecore vs. Pecore, a man named Edwin Hughes transferred his bank and investment accounts into joint tenancy with his daughter, Paula. He also named her and her husband as the residuary beneficiaries of his estate. Two years after the father died, the daughter and her husband divorced.

During the course of divorce proceedings, the son-in-law argued the joint assets were held by Paula Hughes Pecore in trust for the benefit of her father’s estate, and consequently the assets formed part of the residue and should be distributed according to the terms of the will.

Both the Trial Court and the Ontario Court of Appeal ruled the father had made an exclusive gift of investments to his daughter. The courts came to this conclusion even though the father had written the financial institutions stating the transfers were not gifts in order to ensure he did not suffer tax consequences on the change of ownership. This case went all the way to the Supreme Court, which also ruled the joint accounts passed solely to the daughter.

In the second case, Madsen Estate vs. Saylor, an elderly father named his adult daughter as joint owner of his bank account, as well as accounts that held his mutual funds and income trust investments. The father alone deposited funds into the joint accounts. Upon his death, the daughter took legal ownership of the balance in the accounts through right of survivorship, as stipulated in the relevant account agreements.

The other beneficiaries of the father’s estate argued his intention was to have his daughter hold the assets in the accounts in trust for the benefit of his estate, and to be distributed according to his will.

In this case, the trial judge found there was no evidence to support the daughter’s position that her father intended to gift the joint accounts solely to her and said the joint bank account and joint investments should be included in the father’s estate. The Court of Appeal dismissed the daughter’s appeal, as did the Supreme Court.

The Presumption doctrines

The common law has developed certain presumptions of law over a number of years to assist in determining intention in these types of circumstances, and these precedents were relied on by courts prior to the May 2007 SC rulings.

For example, the presumption of resulting trust arises when a person transfers an asset into joint ownership with another person who has not contributed to that asset. In other words, no consideration has been given for that gift of joint asset — in law, equity presumes bargains, not gifts, and therefore does not attribute gift status when a gratuitous transfer of property has been made.

Thus, the law places the burden on the transferee to prove the gift was intended. Failing that, the recipient is said to hold the assets on a resulting trust for the transferor (or for his or her estate).

The Presumption of Advancement, meanwhile, comes into play when it’s assumed a gift was intended after a husband transfers property to his wife, or when a father gives property to a child.

How the rules have changed

In the process of reaching the verdicts in these two cases, the SC set down some much-needed guidance about JWROS accounts regarding the presumption of advancement and resulting trust. The Presumption of Resulting Trust is the general rule for gratuitous transfers, and when it’s in play, the onus is placed on the transferee to rebut that presumption. While this has always been the case in common law, the SC emphasized there must be sufficient evidence to do so.

In the context of a transfer to a child, the presumption of advancement is now limited to gratuitous transfers made by parents to minor children only. That’s important, because it means the presumption does not apply to adult children, whether or not that child was financially dependent on that parent. In other words, courts will now presume no gift was intended from a parent to an adult child, unless it can be established there was intention to do so by the transferor.

The types of evidence in ascertaining a transferor’s intent will depend on the facts of each case, but the evidence considered by a court may include the following:

wording used in bank documents;

control and use of the funds in the account;

granting of a power of attorney;

the tax treatment of the joint account; and

other evidence revealed subsequent to the transfer.

What the changes mean

Since the law changed as a result of the SC ruling, assets held jointly by a parent and a child will no longer automatically become the child’s when the parent dies. The problem with parent-child joint accounts is the potential for insufficient evidence to be available about a parent’s intentions.

With the parent not alive to testify, all that’s left is the will and other relevant documents. If these don’t clear matters up, then courts have a tendency to assume the joint account holder’s intentions in claiming ownership are self-serving, especially in matters where other heirs are present.

Estate planners, accountants and financial advisors may currently be sitting on a powder keg of past files whereby they helped a client establish a joint account at a time when he or she had every intention of gifting that asset to the joint owner. But, following the parent’s death, the child on title may find herself in a position whereby an asset she had expected to inherit now has to be distributed according to the residue of the parent’s will, and subsequently be divided among her other siblings.

For advisors, it becomes difficult in cases where the results of survivorship are disputed by testamentary beneficiaries. If that happens, the advisor may end up being dragged into the dispute as a witness to the parent’s original intention. Or, in some cases, the advisor has to deal with disappointed beneficiaries who look to him for restitution because he served as the parent’s financial advisor.

The potential threat of personal liability is very real, so advisors need to manage that risk by ensuring the people they’re advising properly document all of their intentions.

Also, make sure a client understands his or her existing risk and clearly communicate the issues associated with joint accounts. Defining wishes and helping your clients document intentions about how they want joint assets to be dealt with on death will vastly improve the potential liability position of many files.

The best way to come up with the needed evidence is to have your client create a written record of his intentions. This will help him to avoid a costly and potentially destructive family war. This record of intention can apply to all kinds of jointly registered assets such as automobiles, artwork, bank accounts, investments, and real estate. Details are important, because the SC has specifically stated the content of bank account forms will not necessarily prove intention with a joint account.

Also note the evidence of intention should not be contained in your client’s will. To eliminate any ambiguity, it should be a separate document.

Useful tool

If you don’t have time or inclination to create your own documents, take a look at a set produced by the lawyers at Fish & Associates. They’ve carefully drafted Declaration of Intention documents that can be used by your clients to clearly outline their intentions with joint accounts.

The documents, called the Joint Asset Planning Kit, reflect all of the key elements of the decisions rendered by the SC and they can be used by your client once he’s actually transferred assets into joint ownership.

I have reviewed these documents and find them to be relevant, useful, and user-friendly.

Good paperwork is the key to resolving clients’ disputes and avoiding or defending litigation, so make sure to:

have clients sign the Declarations (which constitute evidence of their intentions) as close as possible to the date when the joint asset is established;

have clients keep the signed declaration with the original will, in a safe place disclosed to the named executor(s); and

maintain a photocopy of the original declaration for yourself.While the guidance provided by the SC in both the Madsen and Pecore cases is quite valuable, these cases also serve as a reminder to estate planners and financial advisors of the importance of properly documenting the intention of the transferor when joint bank and investment accounts are being established. This can serve to avoid costly and unpleasant litigation in the future.

Sandy Cardy is senior vice-president, tax and estate planning, at Mackenzie Financial Corporation. This story originally appeared in Advisor’s Edge’s November issue.

Sandy Cardy