Using Joint Tenancy as a Tool for Probate Planning - Too Good to be True?

After death, some wills may have to be "probated". Probate involves the filing of the original will with the Court together with an application to have the personal representative ( in Ontario the "Estate Trustee" ) formally appointed.

In recent years, there has been much interest and discussion in reducing or eliminating the payment of probate fees. Actually, in Ontario , there are no longer probate fees, but rather a tax called the Estate Administration Tax . The reason it is now called a tax is because the Supreme Court of Canada ruled that the administrative fees called probate fees were in essence a tax and could not be levied without enabling tax legislation. They ruled that probate fees were illegal. Ontario's response to that Court decision was to pass the Estate Administration Tax Act which basically changed probate fees into a tax (which is what everyone thought they were in the first place) .

The tax is calculated as following:
(a) five dollars for each $ 1000 or part thereof of the first $ 50,000 of the value of the estate ( 0.5%);
(b) fifteen dollars for each $ 1000 or part thereof by which the value of the estate exceeds $ 50,000.00 (1.5%)

Therefore the tax is basically 1.5 % of the value of the estate. Estates with a value less than $ 1000.00 do not incur the tax.

Now because the tax is only payable on the value of the estate when probate is sought, the idea of course is to reduce the requirements to have a will probated.

When is necessary to probate a will?

The estate trustee gets his authority to deal with the estate by being appointed in the will. It is therefore not mandatory to have the Court confirm the appointment. However in many instances, third parties such as banks or stock transfer agents require probate to comply with the request by the estate trustee to transfer ownership of assets in accordance with the instructions set out in the will.

Therefore the type of asset being transferred may determine the need for probate.

Joint ownership

Joint tenancy or joint ownership means that on death the property automatically goes to the survivor. Several of my clients have asked me for advice on using joint ownership as a probate planning technique. Unfortunately, sometimes I am consulted after the fact. One of the most common examples I have come across is where parents have named their children as joint owners of their assets . This includes their homes, stocks and bank accounts. The idea behind this planning technique is to have the assets transferred on death automatically without a will.

I typically advise my clients against doing this.

Take the example where a parent names their adult child as a joint owner. If the parent dies first, the child inherits the home without the need for probate. But what happens if the child dies first? Further complications arise if the adult child is married and lives with his or her spouse in the parent's home. Consider the situation where a mother places her home in joint tenancy with her married daughter who lives with her spouse in the mother's home. The daughter then dies before the mother. Under the terms of the Family Law Act, because the daughter is married, the joint tenancy is deemed to be severed before the daughter's death. The mother now owns the home with her son-in law unless the daughter has drawn her will leaving her interest in the home to her mother. As can readily become apparent, the simple plan is getting complicated.

It gets more complicated if the daughter separates from her husband. Now, the daughter's interest in the mother's home may be subject to a claim for equalization under the Family Law Act. This could have been prevented by having the daughter and son-in- law enter into a marriage contract. (Getting more complicated).

Another scenario, daughter gets into credit problems. A judgment is obtained by a creditor. The daughter's interest in the home may be subject to seizure by the creditors. While it would be difficult for the creditors to evict the mother and sell the home, it could very well complicate the mother's ability to sell and /or mortgage the home.

In another scenario, the daughter may turn out to be dishonest, and sell and/or mortgage her interest in the home.

Capital gains

Where the asset transferred to joint ownership is an asset with unrealized capital gains such as stocks that have gone up in value, capital gains tax would immediately be triggered.

Conclusion

While joint tenancy may be useful as a technique to avoid probate fees, great care must be taken to minimize the risks involved. In many cases, the cost of minimizing the risks or the capital gains realized, may very well exceed the perceived savings in the payment of the estate administration tax (probate fees). A lawyer who specializes in estate planning matters should always be consulted before attempting any probate planning on your own.