Placing non-registered accounts into joint ownership with right of survivorship is one of the most common methods of avoiding probate and it can be effective in the right situation.
However, there are some significant disadvantages with joint ownership that may outweigh the benefits.
Fortunately, there are other probate-avoidance options available to help avoid the risks and provide other benefits as well.
Probate is an administrative procedure where the courts confirm the validity of the will and the authority of the executors.
The cost depends on the value of the estate and, in Ontario, it’s about 1.5%. The probate process can be lengthy – months or years if the will is contested – and the probate process makes your will a public record.
The advantage of joint ownership is that, on the death of one joint owner, the asset transfers directly to the survivor without becoming part of the estate or going through the probate process.
But there are disadvantages too:
– The addition of a joint owner will be considered a taxable disposition triggering a potential tax liability if capital gains are realized. It can also impact the taxation of future earnings from the asset, whether it’s an investment portfolio or a rental property.
– The transfer to joint ownership will also result in a loss of control of the asset. Any decisions will now require consent of the other owner.
– As a result of the transfer, you have exposed the asset to the creditors of the new owner if they get sued or file for bankruptcy. If the new owner is married, the asset could be subject to an equalization claim in the event of marital breakdown.
– If a home is made joint, a portion of the principal residence exemption may be jeopardized.
– Any tax liability triggered by the automatic transfer at death will become the responsibility of the remaining estate. Beneficiaries under the will may have their entitlements unfairly reduced.
There are alternatives to reduce costs and complexity of your estate:
– Rather than changing to joint ownership, a Power of Attorney (POA) will allow an appointed child to pay bills on your behalf. A POA also ends at death with no right of ownership. If you’ve taken the time to prepare a POA through your lawyer, always use a notarial copy of that POA with your financial institutions.
Be cautious signing POA forms at the bank – in many cases, it will cancel previous POAs including the carefully considered POA you did with your lawyer.
Segregated funds and Guaranteed Interest Contracts through insurance companies allow you to name beneficiaries and avoid probate for these specific assets. These assets bypass your estate and are paid directly to the beneficiaries – confidentially and usually within two to three weeks of the insurance company receiving sufficient proof of death.
In summary, estate planning is not a “do-it-yourself” project and you don’t get a second chance to get it right.
If you have concerns about your estate plan, seek out the advice of a qualified, financial advisor specializing in estate planning.
It will provide you with peace of mind and potentially save you and your beneficiaries thousands in taxes.
submitted by Dan Allen, senior financial advisor, Dan Allen Financial in Fergus.
