There’s more to joint ownership than you think

(February 2008) Older Canadians are increasingly being advised to transfer assets to their children by making them joint owners of bank or brokerage accounts. This is often bad advice. Merely adding an additional name as co-owner to an existing account is generally not enough. Advisors must take care to ensure that they have created the kind of joint ownership their client really intends. Put simply, joint ownership is not simple.

What is joint ownership?

Joint ownership is a legal arrangement under which more than one person has ownership rights in a particular asset, such as a bank or brokerage account. The joint owners own the entire asset together, so that neither of them may alone assert rights to any particular part of the asset. For example, Joe and his adult son, James, are joint owners of a brokerage account, the sole asset of which is 50 shares of A Co. You might think that Joe owns 25 of those shares, and James the other 25 — in fact, each owns all 50 shares.

How is joint ownership created?

Joint ownerships are most commonly created by gifting, often from a parent to a child. Typically, the parent alone owns an asset and decides to add a child as a joint owner. Usually, the parent intends to own and control the asset while alive and to leave it to his or her child on death. While the arrangement is not intended to be effective immediately, parents often fail to appreciate that granting joint ownership involves an immediate transfer of rights to the child — putting an asset into joint ownership is a form of gifting, and Canadian law requires a fairly high level of proof to establish that a parent intended to gift assets to an adult child.

People often wrongly assume that merely adding a child’s name to a bank or brokerage account form is enough to ensure that the child will own the asset when the parent dies. To make certain that a joint ownership is actually created, it is necessary to clearly document both that the parent intends to gift an interest in an asset to his or her child and the precise nature of the interest in the asset gifted.

In two recent cases, the Supreme Court of Canada has confirmed that the law presumes that a parent who adds a child’s name to a brokerage account does not intend to have that child be the sole owner of the gifted asset when the parent dies. Rather, the law will presume that the parent intended, at most, to give the child some kind of decision-making authority over the asset. In technical terms, when a parent makes a gift to an adult child, the law will presume that there is a “resulting trust” for the parent’s benefit. The following hypothetical scenario shows how these rules can work in practice to frustrate a client’s wishes.

Joe is an 84-year-old widower with three adult children. He lives in Ontario and has been advised that when he dies, his estate will have to pay probate fees of 1.5% of the value of the shares in his brokerage account. He is also told that he can avoid paying these probate fees by putting his shares in joint ownership with one or more of his children, because when one joint owner dies, the other automatically becomes the sole owner of the shares.

More joint ownership?

• There’s more to joint ownership than you think • The joint tenancy trap: Joint names no longer ensure ownership • Disjointed rights part one: Two similar cases, two different rulings • Disjointed rights part two: What’s the intention? • Disjointed rights part three: The Supreme Court decision

Back to joint ownership

Joe’s will leaves his estate in equal shares to his son, James, and his daughters, Gretchen and Gertrude. But James has spent many hours helping Joe maintain his home, so Joe decides that he will leave his brokerage account to James alone. Joe instructs his financial advisor to re-register the account in joint names. The advisor has Joe and James sign a new account form simply describing Joe and James as joint owners, and continues to take instructions from Joe alone. Only Joe benefits from the assets in the account, and only he declares any income or gains from the account and pays the resulting taxes. When Joe dies, James’s sisters initiate a lawsuit, claiming that the account should become part of Joe’s estate. Gretchen and Gertrude win their lawsuit because the judge decides that merely changing the names on the brokerage account was not enough to prove that Joe intended that James alone would inherit the shares.

Different kinds of joint ownership

It is important to note that the legal rules we have described are merely presumptions. They do not forbid a parent to gift assets to an adult child; they merely require that the parent take steps to demonstrate that he or she unmistakably intended to gift rights to property. In Joe’s case, there are various steps that could have been taken to ensure that James alone would have been entitled to the shares.

Legal advice: Joe could and should have been referred to his own lawyer for advice before giving away a valuable asset to his child. This is a helpful step for three reasons. First, because a lawyer would have explained to Joe the implications of giving away his asset. Second, because the involvement of an independent lawyer would help to establish that Joe really intended to make the gift and was not being pressured by a third party to do so. And, finally, because the lawyer could have more fully and carefully documented Joe’s intentions.

Clear documentation: Even if it was impossible or impractical for Joe to seek legal advice, he could still have been invited to document his wishes in writing. Instead of merely creating a new account form, Joe could have indicated in writing that he intended to gift an interest in his account and understood the implications of what he was doing.

What kind of joint ownership: Recent Supreme Court of Canada decisions have clarified that joint ownership can mean at least three different things:

• Full or true joint ownership
• Joint control with no right of survivorship
• Right of survivorship but no controlWith full joint ownership, there is an immediate gift of ownership. Each owner is entitled to share in profits and is obligated to report any taxable income or gains derived from the property. Both have the right to issue instructions on the use of the asset (e.g., on buying or selling stocks in a brokerage account). Each owner has a right of survivorship with respect to the other, which means that if one owner dies, the other automatically owns the asset.

  Joint control means that the parent has given a child the right to issue instructions with respect to the asset, but the child does not actually own the asset. The co-owner is really more like a signatory or agent than an actual owner. On the parent’s death, the co-owner loses his or her ability to make decisions about the asset, which becomes part of the parent’s estate.

  Mere right of survivorship means that the child has neither ownership nor control during the parent’s lifetime but does inherit the asset on the parent’s death.

  Had the account form indicated not just that Joe and James were joint owners but also that Joe intended to gift a right of survivorship to James, it would have been much more likely that the gift would have survived the challenge from Joe’s sisters. Faced with clear and unequivocal documentation, they might not have initiated a lawsuit at all.

  More joint ownership

  • There’s more to joint ownership than you think • The joint tenancy trap: Joint names no longer ensure ownership • Disjointed rights part one: Two similar cases, two different rulings • Disjointed rights part two: What’s the intention? • Disjointed rights part three: The Supreme Court decision

  Back to joint ownership

  The panic over probate fees

  The mere fact that something can be done does not mean that it should be. The desire to reduce probate fees is probably the most common reason we hear for advising older people to put assets into joint ownership. Probate fees are a tax paid in some provinces when a will is registered with the courts. The fee is calculated on the value of the estate’s assets. With true or full joint ownership of an asset, when one owner dies, the other automatically becomes the full owner. For this reason, the jointly owned asset never becomes part of the deceased joint owner’s estate and so no probate fees are paid on the jointly owned asset.

  We certainly understand why people wish to avoid paying probate fees, but it is important to keep this issue in perspective. Probate fees in Ontario are charged at the rate of 1.5%, and an ill-considered joint ownership can expose people to immediate liability for capital gains tax and to the loss of one-half of the asset gifted into joint ownership. The tax liability arises because a transfer to full joint ownership constitutes a “disposition” for tax purposes, giving rise to a tax liability in respect of capital gains. The exposure to loss arises because a transfer to full joint ownership leaves the new co-owner with the right to “sever” the joint tenancy into a tenancy-in-common, leaving him or her the owner of one-half of the asset. Before advising a client to put an asset into joint ownership, it is important to be sure you — and the client — understand the implications of doing so.

  Brokerage issues

  What does all this mean for brokers and advisors? First, be careful and thoughtful in offering advice about joint ownership.

  Second, ensure that the documentation on file reflects your client’s wishes. When reviewing existing files that are jointly owned, consider taking the opportunity to ensure that the client’s wishes are properly documented.

  Third, and probably most difficult, ensure that your tracking systems properly flag and track the client’s wishes with respect to who is entitled to issue instructions on the account during the client’s lifetime, and who owns the assets following the death of one of the joint owners. Most client record-keeping systems with which we are familiar do not have the capacity to distinguish among full joint ownership, mere control and mere right of survivorship. Under standard back office practices, many financial institutions simply remove the name of a deceased co-owner from the account immediately upon receipt of proper notification of his or her death, leaving the remaining co-owner to do as he or she pleases with the account.

  If this is not what the deceased intended, the financial institution is now exposed to liability to the deceased’s estate and disappointed beneficiaries. A financial institution may also be exposed to liability if it was involved in creating the joint ownership but failed to effectively document precisely what the deceased intended.

  In sum, we anticipate that the demand for joint ownership will rise, bringing with it an increased exposure to liability unless financial institutions become more careful about the advice they offer clients and in documenting and following their clients’ instructions.

  Arthur Fish is a partner in the Toronto office of Borden Ladner Gervais LLP and the head of the Toronto Regional Wealth Management Practice. Richard Austin is counsel at the Toronto office of Borden Ladner Gervais LLP.

  (02/01/08)