Joint ownership is a common ownership arrangement that assures that a property remains within an ownership group, like a family — but what are the drawbacks when a cottage is owned this way?
Can we re-cap how joint ownership works for estate planning purposes?
- Under joint ownership, when one joint owner dies, the surviving joint owners continue on as owners and the deceased owner has no further claim on the property
- For estate planning purposes then, joint ownership provides the benefit of allowing the cottage to devolve outside of the estate, and thereby avoid probate tax
So, let’s say mom and dad want to add their adult son as a joint owner, what happens?
- Whenever there is a change of ownership, there is a disposition for tax purposes
- In this case, mom and dad will be deemed to dispose of a proportionate one-third interest in the cottage to son, and they will have to pay tax on that portion of the gain since the last disposition
So now that son is a joint owner, has our family ‘paid all their dues’ or is there more to come?
- Unfortunately, as each death occurs there will be a disposition of a proportionate interest in the property, and tax will have to be paid by the deceased’s estate
- Had things been left alone, it would only be upon the second death of mom and dad that capital gains tax would have been payable
- It’s not necessarily a matter of paying more tax, but rather paying it sooner than otherwise required
Other than this tax complication, is this a sound estate planning strategy?
- If it was a last surviving parent adding on an only child late in life (perhaps nearing death), then this step may simplify the ultimate estate distribution, and any immediate tax consequences are of little concern because they would be coming up shortly anyway
- Primarily you will be avoiding probate tax, but there are other legal issues to consider …
- There are legal fees and government filing charges to be paid each time there is a change
- If the son uses the cottage as a matrimonial home with his spouse then has a marriage breakdown, his interest in the cottage may be included in determining any equalization payment
- If the son has creditor problems, there could potentially be a forced sale of the property
- Finally, if the son dies before the last parent then property will revert back to the parent, and all the out-of-pocket costs and pre-paid taxes will be for naught
- These are the most common concerns, but there can be other issues depending on the personal circumstances — the bottom line is to get professional advice in order to make an informed decision