Estate Planning 101
A topic that has come up recently with a number of clients is holding non-registered investment accounts in joint names with a parent. Today we will discuss some of the issues with holding joint accounts with right of survivorship (JTWROS) with an adult child and some alternative ways to bypass probate.
When you hold joint non-registered investment accounts as JTWROS with a spouse, upon the death of your spouse, the assets will transfer over to your spouse at either fair market Value or the original cost basis (your choice), thereby deferring tax to the future. This process also avoids probate and is handled outside of the Will.
Typically, individuals will hold joint non-registered investment accounts with their parents to bypass probate upon their death. What are some of the issues with this method?
1. Unless the adult child can prove that the joint non-registered account was intended to be a gift to them, the asset is deemed to form part of the estate and subject to probate. For example, in Ontario, if an adult child is on a joint account with a parent and there are no detailed notes what the intentions of the parent was, the assets in the joint account may be deemed to be held in trust (called a resulting trust) and still be subject to probate.
2. Assets listed in Joint ownership with Right of Survivorship will be subject to the creditors of the individuals listed on the account. This can be particularly problematic if there is someone in the family that is a spendthrift and not known for making responsible financial decisions.
3. Potentially problematic estate equalization. Let's say you do intend to gift one child the joint assets in the non-registered account, and have the remaining assets that form part of the estate distributed among the remaining three children. In this case, just specifying all four children as equal beneficiaries of the estate provides an unequal distribution as one child received the assets in the joint non-registered account. Of course you can account for this in the will, but it does make it more complicated.
4. Tax Liability upon transfer into joint names. If you truly gift assets to your adult child and put them into joint names on the account, this could potentially trigger a tax liability if capital gains are realized. If this is done on a house, a portion of the principal residence exemption and eligibility under the Home Buyers' Plan (HBP) or First Home Savings Account (FSHA) may be jeopardized.
Clearly adding adult children on as joint owners on accounts is not as clear a solution as many would have believed. What are the solutions?
If you do have a scenario which might be complicated by one of the scenarios above, there are a couple of options. First, you can always keep it simple and have the parent remain in control of their own account, and have power of attorney enacted to help administer your parents' finances. Of course, in this scenario, the assets would still form part of the estate and would be subject to probate fees, legal fees, etc. but this may be a worthwhile option. If you have a spendthrift in the family or have very specific wishes, it may be better for all assets to form part of the estate and have it handled according to the will.
Alternatively, you could use an insurance product called a segregated fund. Because this is an insurance product, one of the main benefits is the ability to name beneficiaries on non-registered investments. Other benefits include creditor protection, various level of investment guarantees, privately handled estate (anyone's will is public knowledge), asset control, and a quick settlement.
Yes, you do pay a small "insurance" cost to have this done, but in many cases it could be well worth it. As a quick example I'll compare a non-registered GIC (Guaranteed Investment Certificate) investment vs. the comparable GIA (Guaranteed Interest Annuity).
1 Year GIC Rate: 4.60% (Average 1 year GIC Rate. Source: Ycharts)
1 Year GIA Rate: 4.30% (Manulife Investments)
When comparing the two, you might yield a slightly lower return on a GIA, and over a number of years this 0.3% annual cost might be more than running with a GIC and paying probate. If this is a concern, you can always setup and fund a GIA contract with named beneficiaries for a nominal amount ($10k) and at some point in the future transfer the existing GIC's into the previously setup GIA contract. This way you don't run with a lower rate on the GIC's and if you have an idea of declining health you can move the remaining assets into the GIA to take advantage of bypassing probate and a quick settlement process.
As always, each circumstance is unique. Hopefully this shed some light on the topic of joint ownership of accounts with adult children, and if you have any specific questions about your exact circumstance please feel free to reach out.
Best,
Jon
Jonathan Adomait
Financial Planner | CFP, CIM, B.Eng