Joint account – Doug Carroll

Adding an adult child to a joint account

At issue

The two most common ways people choose to own property together are tenancy-in-common and joint ownership. For estate purposes, the key distinction here is that a tenant-in-common interest falls into a deceased owner’s estate, whereas a joint interest bypasses the estate and instead passes to surviving joint owners.

Thus, joint ownership can assist in avoiding probate tax otherwise applying on estate assets. However, a transfer into joint ownership is prima facie a taxable event. That’s not generally a problem for spouses, but the addition of a non-spouse – including an adult child – could mean tax on capital gains is triggered, not to mention potential exposure to creditor risk and matrimonial claims.

The key issue is if and when beneficial interest in the property passes. Recent cases have explored grey areas, signaling a warning to ill-advised efforts and shedding a light on expanded planning opportunities.

2007 SCC 17 Pecore v. Pecore, 2007 SCC 18 Madsen Estate v. Saylor

These concurrently-heard Supreme Court of Canada (SCC) cases involved claims following the death of an aging father who had added an adult daughter as joint account owner. In each case, the respective father maintained control of the accounts, used the funds for his own sole benefit, and paid all associated taxes.

The SCC held that the law of resulting trust applied where there is a transfer to an adult child with no consideration given in exchange. This means that the transferee child has the burden of proof to prove that it was the parent’s intention at the time of transfer to pass a beneficial interest.

The daughter succeeded in Pecore where it was held that a joint interest was established at the time of opening the account. However, the interest was not outright, but rather it was the transfer of the right of survivorship in what might remain in the account at the father’s death.

In Madsen, the daughter was unsuccessful, and was thus determined to be holding the remaining account value at the father’s death, for the benefit of the estate beneficiaries.

2014 ONCA 101 Sawdon Estate v. Sawdon

After experiencing frustration in dealing with his wife’s bank accounts after her death, Arthur Sawdon transferred all his financial accounts into joint ownership with two of his five adult children. He stated to them his intention that all five should receive equal entitlements.

The passing of the estate trustee’s accounts was challenged by a charity that was the residual beneficiary of Arthur’s estate. The charity sought to have the jointly held assets of about $1 million included in the distribution, presumably on the basis of a resulting trust in favour of the estate.

Rather than being a resulting trust, the appeal court found that there was an express trust at the time of the transfer into joint names. In the judge’s words, “from the time that the Bank Accounts were opened, those holding the legal title to the Bank Accounts held the beneficial right of survivorship in trust for the Children in equal shares.”

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

Absent evidence to the contrary, the addition of an adult child as a joint owner immediately transfers property rights. In theory the transferee could immediately access and use the funds for his or her personal benefit.
Under a resulting trust, the adult child will be entitled to the account proceeds at the parent’s death, to be distributed among the estate beneficiaries.
An adult child who rebuts the presumption of resulting trust is beneficially entitled to the account proceeds at the parent’s death.
It may be that a trust is created at the point of transfer for which the beneficiaries are other than the estate, though the point of entitlement is again at the parent’s death.
Given the multiple potential outcomes, it may be advisable to create a record of the parent’s intentions at the time of transfer. While the financial institution’s forms and the parent’s later actions may have some evidentiary value, a written statement made contemporaneous with the transfer would provide greater certainty.

Jointly owned investments with adult children – Complications abound, so be careful

Joint ownership is one of the most common ways for two or more people to hold property. This includes real estate, as well as personal property such as bank and investment accounts.

The reason investors do this is for simplicity, including the ability to transfer assets to the other owner should one die. With the deceased’s estate bypassed, there could be a probate tax savings of as much as 1.5% of the property value in some provinces.

In the case of spouses who intend to pass property to one another on a first death, this can be a cost-effective and efficient way to transfer property. But when non-spouses are involved, complications arise.

Adding adult children

It can be problematic to add an adult child as a joint owner. In particular, income taxes may be unintentionally triggered, the property may become exposed to the child’s creditors (at least in part), and there is exposure risk if a child’s marriage breaks down.

Beyond that, there can still be significant grey areas. Merely recording title as joint ownership does not necessarily make it so. The actions and intentions of the transferor parent, and surrounding circumstances can affect the nature and extent of the ownership interests being transferred.

These concerns most often surface after the death of the parent, when siblings or other estate beneficiaries may contest the child’s claim to ownership. An Ontario Court of Appeal case from earlier this year illustrates how this can lead to hostile and costly disputes.

Competing sibling and estate claims

Arthur and Hilda Sawdon held most of their bank accounts jointly. After Hilda died in 2004, Arthur was frustrated by delays obtaining the release of the one account that had been in Hilda’s name alone. To avoid this problem for his own estate, he decided to transfer his bank accounts into joint ownership with two of his five adult children. He told them all five should receive equal entitlements.

In 2006, just before the last account transfer, Arthur executed a will naming the Watch Tower Bible and Tract Society of Canada (Watch Tower), a religious charity for Jehovah’s Witnesses, as the residual beneficiary of his estate.

Arthur died in 2007, and a dispute arose over the contents of the bank accounts: about $1 million.

Watch Tower relied on the Supreme Court of Canada’s ruling in Pecore. In principle, when a parent adds an adult child as joint owner, it is presumed that the child holds title as a trustee for the parent’s estate. Watch Tower’s sole witness was the lawyer who drafted Arthur’s will, who claimed Arthur intended the bank accounts to form part of the estate.

Undisclosed to Arthur, the lawyer was an elder with the Jehovah’s Witnesses, and had acted as Watch Tower’s counsel in the past. The trial judge found his evidence neither credible nor reliable.

The appeal court distinguished the facts in Pecore, based on evidence of Arthur’s expressed intentions and his experience with and knowledge of joint ownership. Rather than there being a trust for the estate beneficiaries, from the time the account was opened, the two children on title held the beneficial right of survivorship in trust for all five children.

The estate trustee (who was also one of the sons on title) was awarded partial indemnity of his costs from the estate, with the balance to be recovered from Watch Tower directly. Total costs were about a quarter of a million dollars. It took almost seven years from Arthur’s death to reach this court resolution.

Stuck in the middle with … : Advising on joint accounts

You just picked up a voicemail message that an ill client is on the way to your office to add an adult child as joint owner of an investment account.

Your mind starts racing: What does the client intend, and will that intention be upheld should there be a later estate challenge?

The critical principle in the Supreme Court of Canada’s Pecore decision (May, 2007) is that there is a presumption in such circumstances that it is not a beneficial transfer, though the transferee is welcome to prove otherwise. But how?

Tarling is an Ontario case from this past July that applied the Pecore principle. At trial, the financial advisor was called to testify about his dealings with the deceased father, advising the court that the elderly Mr.Tarling stated specifically that he wanted his investments to pass to this chosen son. On all the facts, the judge determined that that was indeed the intention and result of the transaction.

Still, a joint ownership transfer may be easy to complete, but often not so simple in its results. Is your client aware of all the potential tax and legal implications? And beyond that, will your client enunciate in as clear a manner as Mr.Tarling, so that you too would be comfortable giving testimony in court should you be called upon?

In the post-Pecore era, you need to be vigilant with a written log of all client communications, ideally with client sign-off of the issues you raise, and possibly including a direction that the client may only obtain tax and legal advice from appropriate licensed professionals.

Your client just arrived. Are you ready?