Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians. He can be reached at firstname.lastname@example.org
I think I really blew it this year. I'm talking about my wife Carolyn's birthday gift, which I bought her four weeks ago. You see, we went through a phase where we'd buy things for each other that were really gifts for the two of us. You know, we'd want to renovate the living room, so we'd pay for that and call it my birthday present. Or we'd want a hot tub, and I'd buy that for her, for her birthday. I started to enjoy this manner of gift giving. I think I started to cross the line last year when I bought a new plasma television that she didn't care to have. This year, I bought her some golf clubs that we can share - although she's five inches shorter than me and doesn't like golf.
The bottom line? She has started to question my intentions when I give her something. "Is this really a gift?" she asks. "Who is supposed to be the beneficial owner of this stuff?" she wonders. Darn. She's on to me now. At the end of the day, my gifting dilemma can be fixed - next year when I buy her hockey skates, I'll just admit up front that I intended to be the real owner. Honesty is the best policy.
The truth is, there are gifts of a different sort that can cause even greater problems in a family. Take the example where a father effectively transfers property - perhaps by joint ownership - to one of his children, but it may not be clear whether he intended to gift the property to that child, or he simply wanted that child to manage the property for him and the other siblings.
This is called the "presumption of resulting trust," which is the notion that property is transferred to someone who pays nothing for it; and then is implied to have held the property for benefit of another person.
I wrote a while back about the story of Niels Michael Madsen. Let me share the ending of that story today. It's a story that provides a valuable lesson: Putting assets into joint names can be a disaster unless you make your intentions clear - in writing. As a recap, Mr. Madsen died in 1998. His will said his estate should be divided into two equal parts, with one part being divided among his grandchildren, and the other part being divided equally among his three children, Betty, Anthony and Patricia.
There was no disagreement about the wording of Mr. Madsen's will. Instead, there was disagreement about what assets should form part of Mr. Madsen's estate. You see, prior to his death, Mr. Madsen had put his bank and investment accounts in joint names, with right of survivorship, with his daughter Patricia. These assets totalled $365,000. Upon his death, the assets were then in the hands of Patricia, in her name alone.
Betty and Anthony argued that it was not the intention of their father to make a gift of those assets to Patricia when they were put into joint names, but was done simply for convenience. Patricia, on the other hand, argued that her father had intended to make a gift of those assets to her upon his death. The battle between family members in this case resulted in legal fees that effectively wiped out the money they were fighting over.
The Ontario Court of Appeal sided with Betty and Anthony. Patricia then sought leave to appeal to the Supreme Court of Canada. The Supreme Court heard the case, Madsen Estate v. Saylor, and rendered a decision that the presumption of resulting trust should be applied. That is, a gift to Patricia was not intended, but it was intended that Patricia should simply hold the assets for the benefit of all the beneficiaries of Mr. Madsen's estate.
Where the presumption of resulting trust applies, the onus is on the transferee (Patricia in this case) to establish, on the balance of probabilities, that a gift was intended (called the "presumption of advancement"), failing which the beneficial right to the property in question will rest with the transferor (or his or her estate).
You can see that joint ownership can lead to costly litigation once you're gone unless you document your intention: Is the transfer for convenience only, or is the transferee entitled to the property in his or her own right?
Make sure your lawyer and financial advisers have a copy of your written intention.