Ah yes, the battle for the Stanley Cup is in full swing. When April rolls around, I tend to spend a lot of time in front of the television keeping my hand on the pulse of the pursuit of Lord Stanley's cup. But I try to be sensitive about the needs of my family, and so I felt it was only fair to ask the question five weeks ago: "Carolyn, is there anything you'd like to say to me before the playoffs begin?"
Speaking of national pastimes, the NHL playoffs come second only to joint ownership. Just about every household has assets that are owned jointly between spouses, or between parents and kids. This is often a bad thing. Let me explain.
THE IDEA
The term "joint ownership" is used to loosely describe one of two common legal relationships: Tenants in common, or joint tenancy with right of survivorship (JTWROS). Tenants in common owners each hold separate ownership interests that can generally be sold or transferred without the consent of the other owners. But JTWROS is more common.
More Report on Business Stories
In the case of JTWROS, the survivorship feature means that when an individual dies, the deceased person's interest is automatically distributed to the remaining joint tenants. Think of this as a "winner takes all" game. The asset will pass to the surviving owners outside of the deceased's estate. The result? Probate fees are avoided.
THE PROBLEMS
Before you jump to place your investment accounts, home, or other assets into JTWROS, consider some drawbacks.
Creditor exposure. Property transferred will become open to attack by creditors of the person receiving the property (the transferee).
Ex-spouse exposure. If you place an asset in joint names with a child, for example, and your child later divorces, half the interest in that property may end up in the hands of your child's ex-spouse.
Loss of control. Once in joint names, you won't generally be able to recover the transferred property without the consent of the transferee, and you'll need the transferee's consent to sell the property, or mortgage it.
Unintended distribution. If you place an asset in joint names without making clear your intention as to who really has beneficial ownership, the asset may not be distributed in accordance with your wishes upon death.
Depriving your kids. You may be in a second marriage and intend to leave some or all of your assets to your children from your first marriage. If you place your assets into joint names with your current spouse, however, the property will fall outside of your estate and will be distributed in accordance with your current spouse's will, not your will. The kids from your first marriage may end up with nothing. There are ways to meet your current spouse's needs, and still leave the assets to your children (a spousal trust is one example).
Loss of exemption. If you place your principal residence in joint names with a child who already owns a home, it's possible that half of your residence will be exposed to tax on a sale later since your child will not be entitled to use his principal residence exemption on the half of your home he owns, if he doesn't ordinarily live in your place.
Land transfer tax. Land transfer tax could be payable when real estate that is subject to a mortgage is conveyed to another person.
THE COURT
In addition, it has always been a concern that placing an asset in joint names could create a taxable disposition of that interest transferred. You see, to avoid probate fees, it's been commonly believed that you'd have to transfer beneficial ownership to another person, which also results in a taxable disposition. Now, it's never been a problem when putting assets into joint names with your spouse, but joint ownership with others is a different story.
Interestingly, a recent Supreme Court of Canada decision suggests that this concern can now be laid to rest. In the case Pecore v. Pecore (2007 SCC 17), the court made the statement: "Where the transferor's intention is to gift the right of survivorship to the transferee but retain beneficial ownership of the assets during his or her lifetime, there would appear to be no disposition at the moment of the setting up of the joint account."
That is, it appears that taxpayers can now avoid probate fees and a taxable disposition when placing the asset in joint names. It's like having your cake and eating it too.
53