Co-Own Property? Be Aware of the Risks
Why a power of attorney is often the best solution.
Do you see sharing your assets through joint tenancy as a shortcut to a better estate plan?
While it’s true owning your property with another has its advantages, joint tenancy also carries its fair share of risks. More often than not those risks can outweigh the benefits. Joint ownership may even cause you to lose out on planning opportunities that come with keeping your property yours alone. That’s why it pays to consider a smarter alternative: a power of attorney.
Why joint tenancy?
What gives joint tenancy its appeal? First there’s the convenience. Married couples often keep joint bank accounts to handle daily finances like paying bills. When aging parents need help managing their financial affairs, it’s not unusual to place investments in joint tenancy with adult children.
Families concerned with wealth transfer turn to joint tenancy as a low-hassle method of reducing probate costs, particularly important in high-fee jurisdictions like British Columbia. When property is held jointly with right of survivorship, on the death of one owner title to the joint assets generally passes outside the deceased’s estate to the surviving joint owner, bypassing probate in the process.
Where things can go wrong
A lure of joint ownership is it’s easy. It can be set up quickly at little cost and with minimal paperwork. At times it can be a sensible decision, like when dealing with a simple estate or sharing property with your spouse. Sadly, it could also turn out to be a convenience that costs you in the long run, especially where adult children are involved. Consider the following risks before you embrace joint tenancy as a planning tool.
1. Loss of control
Under joint tenancy each owner has an equal share and full rights to the joint property, which can be problematic. For example, there’s little to stop a joint account holder from taking funds to use for their own purpose. At the other extreme, you could be forced to obtain consent of the joint owner before acting, such as when selling real estate.
Once you share ownership of your property it’s not a decision you’ll be able to reverse unilaterally.
2. Exposure to creditor claims
Jointly-held assets are open to claims by the creditors of any joint owner should he or she run into difficulty, whether it’s financial trouble, divorce proceedings or legal action. If you add your adult son or daughter as a joint holder of your investment accounts and they one day declare bankruptcy, those now-joint investments could be jeopardized.
3. Unexpected tax consequences
Transferring assets into joint names has the potential to generate taxable capital gains. Under the tax rules, switching to joint ownership means you’re essentially gifting a half interest in the asset to the other party at fair market value. Any gains you have on that portion of the property become taxable. And though the spousal rollover provision defers the tax bill when sharing joint tenancy with your partner, attribution of future gains and income may still apply.
Updating title on a home could impact a principal residence exemption. If you transfer your dwelling into joint tenancy with an adult child two things can happen. First, you’ll be limited to claiming your exemption on only half the home’s value. Plus, if your child can’t use their principal residence exemption on their share of your home, perhaps because they’ve already applied the exemption elsewhere, their portion could become taxable when the property is sold.
4. Strained relationships
Most times a joint owner will also be a beneficiary to your estate. But because survivorship has priority, even when they’re not they could still wind up with your assets – maybe contrary to the wishes expressed in your will. The outcome? Possibly strained relationships or even litigation, as your heirs fight to claim your property.
Feelings of unfair treatment might bubble up in a blended family situation where you’re balancing the needs of a new spouse and children from a prior relationship, or when you have several adult children but choose to share ownership with only one of them.
5. Lose use of testamentary trusts
When you die, assets you own in joint tenancy generally pass to the survivor and out of your name. When that happens the opportunity for your estate to pay less tax as a graduated rate estate (GRE) testamentary trust is lost. (A GRE is a testamentary trust arising from an individual’s death that is permitted to use graduated personal tax rates for up to 36 months, subject to conditions.)
Normally your beneficiaries would be able to split income they receive from your assets with the GRE for up to three years and reduce their tax bill. The potential tax savings from this arrangement can more than offset the costs of probate. Note that after the tax advantages of the GRE cease, as a testamentary trust it still offers value including creditor protection and property safekeeping for the benefit of beneficiaries.
Gift or Not?
If you add your adult child as a joint tenant to help you manage your property, don’t assume those assets will automatically transfer probate-free from your estate to your child’s hands after your death. Legal precedent exists in Canada for property to be retained by the estate in cases where a joint owner, other than a spouse, fails to prove the assets were intended as a gift.
If you see joint ownership as route to transfer wealth to your adult children, first discuss your plans with your advisor to ensure you document your intentions correctly.
The power of attorney: a wise choice
A well-designed power of attorney can help you avoid joint tenancy’s inherent difficulties.
A power of attorney (POA) allows someone you appoint – your ‘attorney’ – to manage your financial affairs when you cannot, whether due to temporary factors, or long-term issues like serious injury or mental incapacity.
Unlike joint tenancy, a POA doesn’t extend ownership of your property to another, only authority over it. That authority is at your discretion. You may amend or revoke the power of attorney as you wish, as long as you’re mentally capable.
The beauty of a POA is its flexibility. You can grant your attorney broad powers to handle your finances, or limit their scope to a particular activity or situation, like paying bills or selling a house. Once in effect a POA can be active for years. Or, it can be time-limited, as when you ask your attorney to look after things while you’re travelling.
The authority of a general POA ends once you lose mental capacity. To guard against this an enduring power of attorney is necessary to allow your representative to continue managing your affairs. A POA can also be made springing or contingent if you want it triggered only after a specific event occurs such as a diagnosis of incapacity.
In situations where a parent wants help managing their property, but would rather not share title, a POA is often an ideal solution.
Tips for creating a power of attorney
Powers of attorney are robust legal tools that should be created with care. Observe these guidelines to help ensure you get the results you want.
- Learn what your POA can and can’t do. Your POA’s range of activity isn’t limitless. For example, they can’t make, change or revoke a will, delegate authority to someone else unless specifically authorized, or have their interests conflict with yours.
- Choose your POA wisely. Your nominee should be trustworthy, reliable, financially competent, and have the time to carry out their duties. You may appoint more than one POA. In some circumstances it may be prudent to name a legal professional, financial advisor, or a trust company to represent you.
- Review your POA selection periodically. The person you nominate today might not remain suitable as time passes and your circumstances change. Remember to adjust your POA as necessary to keep it aligned to your short-term and long-term goals.
- Talk first. Despite its advantages a POA still has the potential to stir up family discord. When contemplating the naming of a POA, it’s a good idea to discuss the situation with your loved ones and hash out any concerns beforehand.
- Work with a qualified professional. Beyond ensuring a POA complies with legal requirements, you want your document to help you achieve your objectives and protect your interests, not hamper you with unintended consequences. Get proper guidance.
Understand your options
Opting for joint tenancy is a convenient choice, but not always the wisest. The key is getting the right advice. At BlueShore Financial, we can help you decide when joint ownership may be a good fit and where a power of attorney would be a safer and smarter option. Speak with your advisor to learn more.