Saturday, September 17, 2005

Six Potential Pitfalls Parents Should Consider Before Transferring Real Estate Into a Joint Tenancy with Their Children

When the provincial government increased probate fees in British Columbia several years ago, more people became concerned with avoiding probate fees. Unfortunately, sometimes the potential costs and risks of avoidance far exceed any benefit. One method of probate avoidance that concerns me is when a parent transfers real estate into a joint tenancy with his or her child or children, without very carefully considering all of the potential repercussions.

When the parent transfers title to real estate into a joint tenancy with one or more children, on the parent’s death, the surviving child or children may then transfer the real estate into the survivor’s name (or survivors’ names) without probating the deceased’s Will. If in transferring title to a child’s name, the parent intended to make a gift to the child, then on the parent’s death, the child acquires the entire interest in the real estate by right of survivorship, instead of the real estate passing under the parent’s Will. In some cases, it will not be necessary to probate the parent’s Will at all, and in others the parent’s personal representative does not have to declare the value of the real estate in the application for probate in British Columbia for the purpose of calculating probate fees (unless the surviving joint tenant is really holding title in trust for the the parent's estate).

One may contrast a joint tenancy with ownership by two or more people as tenants in common. If two or more people own real estate as tenants in common, and one owner dies, his or her interest pass through his or her estate to the beneficiaries under his or her Will.

Although by transferring the title to real estate into a joint tenancy with a child or children, the parent may save his or her estate some probate fees, there are at least six potential disadvantages.

First, when the parent transfers the real estate into a joint tenancy with children, the children become co-owners. This means that if the parent later wants to mortgage or sell the real estate, the parent must get the children’s permission, and they must sign the mortgage or transfer documents.

Secondly, because the children are co-owners, if a child’s marriage breaks down, that child’s spouse may claim a share of the child’s interest in the real estate.

Thirdly, if any child has financial problems, that child’s creditors may register a court judgment against the child’s interest in the real estate, and then apply to have the real estate sold to pay the child’s debt out of the child’s share. If we are talking about the parent’s residence, this could be devastating.

Fourthly, if the real estate is the parent’s principal residence, the family may lose some of its capital gains exemption after the real estate is transferred into children’s names. If the children have their own principal residences, and the value of the parent’s principal residence increases, they will not be able to shelter any gains in the value of their interests in the parent’s principal residence under the principal residence exemption as defined in section 54 of the Income Tax Act (Canada). This means that they may have to pay capital gains tax when the real estate is sold. In contrast, if the parent keeps his or her principal residence in his or her own name, the parent will not have to pay capital gains tax on the increase in the value of real estate as long as it qualifies as the parent’s principal residence.

Fifthly, if the real estate does not qualify as the parent’s principal residence, then on transferring the real estate into a joint tenancy, the parent may trigger a tax liability that could have otherwise been deferred.

Sixthly, where the parent transfers the real estate into a joint tenancy with two or more children, and one of the children dies before the parent, that child’s share will go to the surviving owners, rather than to that child’s own children. This may be contrary to the parent’s estate plan if the parent would prefer that the deceased child’s own children inherit the share that would have gone to the deceased child on the parent’s death.

There are ways that a parent can minimize some of the risks and costs associated with transferring real estate into a joint tenancy with children, but is important that anyone considering doing this carefully consider all of the ramifications.

No comments: