Since 2007 and the ground-breaking Supreme Court of Canada case of Pecore v. Pecore (“Pecore”), the Courts have decided many cases concerning assets held in joint tenancy, and have had a chance to “work through” some of the nuances and legal challenges presented in Pecore.
This article is intended for those professionals who are interested in learning more about the legal challenges presented by joint tenancy ownership. With a greater understanding of the challenges, we can help protect our clients, and their estates, from being the subject of Pecore-style litigation.
In particular, we will address the following issues:
- Effect of the Pecore decision on joint tenancies;
- Documenting intention at the time of transfer;
- Documenting intention after the transfer;
- Unexpected severance of joint tenancies;
- Exposure of asset to creditors/claimants;
- Tax treatment of jointly held assets; and
- Ineffectiveness in attempting to avoid probate.
1. Effect of Pecore on Joint Tenancies
The Pecore decision changed the legal framework of how certain joint tenancies are treated. In particular, the decision focussed on gratuitous (i.e., given for free) transfers between a parent and an adult child, including transfers into joint tenancy. Post Pecore , it is no longer the case that simply putting an asset into “Joint With Right Of Survivorship” ownership status will ensure that the asset will pass to the surviving joint owner upon death of the original owner.
In fact, unless there is clear evidence to prove that the transferor (for this paper, we will refer to the transferor as the “parent”) intended the surviving joint owner (the child) to receive the asset, it will be considered part of the parent’s estate upon the parent’s death, and not the property of the surviving child. This is called the “presumption of resulting trust” and applies to all sorts of property, whether bank accounts, investments or land.[1]
As a result, where the intention of creating joint ownership is to gift the asset upon death, that intention should be clearly documented, in order to rebut the presumption that would otherwise mandate the opposite result. This is where legal and financial advisors can play a key role in reducing the chance of a dispute over the asset once the parent has passed away.
2. Documenting Intention at the Time of Transfer
A legal advisor should be consulted prior to the transfer of an asset into joint names to ensure that the client’s intentions are clearly documented – either: 1) by way of letter or deed confirming a gift; or 2) by way of trust declaration confirming that the asset is not being gifted to the surviving joint owner, but instead is to be held in trust (often with the goal of probate avoidance) arrangement.
The Pecore decision highlighted the distinction between legal ownership vs. beneficial ownership. This distinction can be thought of as the difference between “who is on title” (legal ownership) vs. “who is the real owner” (beneficial ownership). Transfer of an asset into joint tenancy is a transfer of legal title to the asset, but as Pecore emphasized, may not be a transfer of beneficial ownership.
Instead, there could be as many as four possible intentions/outcomes with respect to the beneficial ownership of a jointly-owned asset:
- True trust, where both legal ownership and beneficial ownership are held in trust for the parent during the parent’s lifetime and, after death, for the parent’s estate and its beneficiaries (this is the scenario presumed by the presumption of resulting trust from Pecore , and is the default position if there is no evidence to the contrary).
Example: elderly mother adds her son to her bank accounts, so that the son can assist her with banking and managing finances, purely for convenience. When mother dies, she expects son to pay mother’s funeral and other bills, and then divide what remains equally among all the children, in the same manner as her Will distributes her other assets. In this example, the son holds money as a trustee, in trust for mother’s estate.
- Gift of the right of survivorship only, meaning that the child only holds bare legal title in trust for the parent until the parent’s death. The child’s beneficial ownership is delayed until the parent’s death, at which time the child takes full beneficial ownership by way of survivorship.
Example: elderly mother adds her son to her bank accounts, so that the son can assist her with banking and managing finances, purely for convenience during mother’s lifetime. But, when the mother dies, she intends that the son will keep what remains in the joint account for himself.
- Gift of the beneficial ownership of the asset (or a portion thereof) with immediate effect – in other words, true joint ownership.
Example: elderly mother adds her son to her bank accounts, intending for them to share the accounts, and, if son wanted, he could spend all the money in the accounts on himself. Regardless of who dies first, the survivor keeps what remains in the joint accounts for him/herself.
- Trust for others, where the child holds both legal ownership and beneficial ownership, on trust for the deceased during his or her lifetime and, after death, not for the deceased’s estate, but instead for others (which may, but does not have to, include the surviving joint owner).
Example: elderly mother’s Will leaves her entire estate to charity. Mother adds her son to her bank accounts, so that the son can assist her with banking and managing finances, purely for mother’s convenience. When mother dies, she expects son to pay mother’s funeral and other bills, and then divide what remains equally between the son and one other child, but does not want the funds from the account to be part of her estate.
The advisor ought to ensure that the documentation properly evidences the intention – it is not enough simply to say that the transfer is a gift, or that the asset is held in trust. If a gift, is it an immediate gift or is it a gift which is only intended to take effect on death (i.e. a gift of the right of survivorship)?[2] If a trust arrangement, is the trust intended to continue after death or to become a gift to the child at that time? And if the trust continues after death, who are the beneficiaries of it – the beneficiaries under the Will, or others?
Clients should consult with an estate lawyer to discuss these concepts, and obtain advice as to the best way of confirming their intentions on paper. Ideally, these consultations and the documentation of intention will happen before the transfer, but it can be possible to retroactively document these types of transfers.
3. Documenting Intention After the Transfer
A more difficult scenario, unfortunately all too common, arises when a person discloses the transfer to a legal or financial advisor only after the transfer is complete. In many cases, this occurs when the parent is obtaining banking or estate planning advice and mentions that certain asset(s) have been made joint with some other person, usually a child.
What kind of after-the-fact evidence can be produced to prove a previous intention? Pecore tells us that post-transfer evidence of intention can be considered, but that it must be closely scrutinized to ensure there has been no change in intention arising after the transfer.[3] The requirement for careful scrutiny of such after-the-fact evidence can pose problems with attempting to document the intention of a previous transfer, especially where the co-owners no longer agree what the original intention was.
In McKendry v McKendry 2015 BCSC 2433 (“McKendry”), the mother had transferred property into joint names with her son, in January 2008. There was clear evidence that, when she added him to title, she intended that he hold his interest in trust for her only while she was alive, and that on her death he was to share the land with his siblings – it was not originally supposed to be a gift of the land to just him. She later changed her mind, and in December 2010 signed a document cancelling the trust arrangement, and stating that she now wanted the son alone to receive the land when she died, as a gift from her (he did not need to share with his siblings).
When the mother later died, and notwithstanding the signed document, the trial Court rejected the son’s argument that a true gift had been made. The Court found that the key was the mother’s intention in January 2008, and that evidence contemporaneous with the transfer indicated the mother’s original intent was that the son held the property in trust for the mother – it was not to be his. The subsequent evidence (the December 2010 document) indicated only that the mother had changed her intention afterwards, which the Court held to be insufficient. The Court also rejected the alternative argument that if the January 2008 gift were not a true gift, then it was perfected or turned into a true gift by the subsequent documents.
The son, unsatisfied with this outcome, appealed the decision to the B.C. Court of Appeal. The BCCA agreed with him and overturned the lower Court’s decision. The BCCA decided that the December 2010 document had the effect of gifting the right of survivorship in the property to the son, such that he would receive the beneficial interest upon her death. By first adding him as a joint tenant, and then signing the December 2010 document, the mother had done “everything necessary” to give the beneficial interest to the son.
The Court of Appeal decision is of significant assistance in permitting parties to revisit and document the intention of previous transfers, without having to take overly technical steps such as re-conveying the property or putting a gift under seal.
The McKendry case also demonstrates the importance of documenting the intention, even if the transfer has already occurred. After-the-fact documentation remains, however, merely a way to make the best of a bad situation – clearly documenting intention at the time of transfer is certainly preferable. This is particularly true where the intention was for the child to hold the property in trust for the parent (not a true gift). If the parent and child later become estranged, and the child takes the position that the transfer was a gift, then the child will obviously not voluntarily participate in any after-the-fact documentation and will surely take the position that such documentation is evidence only of a changed intention that the court can ignore.
This is how disputes arise.
These cases illustrate that this area of law is extraordinarily troublesome, and serve as good reasons why clients should be careful, get competent legal advice, and avoid using joint tenancies as a haphazard “inexpensive” method of estate planning.
4. Severance of Joint Tenancies
“Severance” is a separate challenge that exists with joint ownership.
Land
Joint tenancy (that is, a true joint tenancy with the right of survivorship) depends on the existence of “four unities”: time, title, interest and possession. The joint tenancy will be terminated or “severed” when any one of the four unities is broken. Prudent advisors must be aware of the consequences of the four unities when using joint tenancy as an estate planning tool.
Take, for instance, the classic case of an elderly parent transferring title to her home into joint tenancy with her adult child. For a true joint tenancy to exist, the fourth unity requires that the parent and child must each have the right to possession of the entire property.
However, if the parties’ expectation is that the parent would have sole possession of the home during her lifetime, then arguably there is no unity of possession and the ownership arrangement was either not a true joint tenancy, or had been severed by the destruction of the unity of “possession” and as such is in fact a tenancy in common. As a tenancy in common, the parent’s 50% interest in the home would pass through her Will on death and not directly to her child.
Bank Accounts
The application of the four unities to jointly held bank accounts can raise even more complicated issues, partly because either joint owner has the right to withdraw all of the funds. This makes it possible for a joint tenant to sever a joint tenancy over a bank account simply by removing the funds in it.
In another recent case, Zeligs v Janes, the mother had transferred title to her residence into joint tenancy with her daughter, intending that the property would pass to the daughter upon the mother’s death. The mother and daughter sold their jointly owned home and placed the sale proceeds in a joint account. The Court found that this sale did not sever the joint tenancy over the residence; however, the joint tenancy over the sale proceeds was severed when the daughter later withdrew the sale proceeds and deposited them into account in her own name.
As a result of the severance, the daughter no longer enjoyed the right of survivorship in respect to the sale proceeds and was only entitled to retain 50% of these on her mother’s death; the other 50% had to be repaid her mother’s estate.[4] By her unilateral actions, the daughter had, unbeknownst to her, prejudiced herself and destroyed her own right as a joint owner to receive 100% of the sale proceeds upon her mother’s death.
The potential for an unexpected severance further strengthens our general advice to clients to avoid using joint tenancy simply as a blunt estate planning tool.
5. Exposure of Asset to Claimants
People who are interested in using joint tenancy ownership must also be cognizant of the risk that adding a child to title could expose that asset to the child’s creditors. If a creditor obtains judgment against the child, the creditor will likely search for assets and discover the jointly owned property, and register the judgment against it. At a minimum, this could complicate the parent’s later sale of the property, as the parent would either have to a) agree to pay the child’s debt out of the sale proceeds, or b) convince the creditor that the child actually has no beneficial interest in the property despite being on title, an explanation that creditors are not inclined to accept easily.
Another common way that jointly held property is exposed to claims against the child is in divorce proceedings, where the child’s spouse may take the position that the jointly held property is a “family asset” and subject to division. Even if this claim is not accurate, the child’s spouse can tie up title to the property by way of a certificate of pending litigation.
This complication (the potential for exposure of the jointly held property to the child’s creditors/claimants) is another reason why parents must document the intention behind a transfer. A properly drawn Trust Agreement, made before or contemporaneous to the transfer, can substantially reduce the parent’s risk.
6. Tax Treatment of Jointly Owned Assets
Other (often overlooked) aspect of placing assets into joint tenancy are the tax consequences of such transfers. The transfer of most real property into joint tenancy is a disposition of part of a capital asset, meaning that:
- the transfer may trigger immediate capital gains tax payable by the parent on the portion of the property that was transferred to the child;
- when the parent later sells the property, 1) the child may be liable for capital gains tax on the portion that was transferred to them; and 2) the parent may lose their principal residence capital gains tax exemption on the portion of the property transferred to the child.
For financial assets, a transfer to joint ownership may lead to income earned in an investment account being taxable in the child’s hands.
Without proper care, these potential tax implications of joint ownership can erode or even consume the savings hoped to achieve by avoiding probate fees as a result of the transfer. In some cases, the parent may instead find him or herself facing a significant capital gains tax bill, and adverse consequences on his or her lifestyle and retirement plan.
7. Ineffectiveness in attempting to avoid probate
As mentioned above, while the joint-tenancy approach is a popular “do it yourself” approach to estate planning, it can come with unintended consequences, and where it is done to avoid probate fees, this approach frequently backfires. Contrary to popular belief, holding a bank account or land in joint ownership with a child does not necessarily keep it out of probate when the parent dies. If it is the type of joint tenancy where:
- the child holds the property in trust for the parent’s estate; and
- there are any other assets that do require probate, such as another parcel of land, an expensive vehicle, or a large bank account; then,
the joint assets will have to be disclosed by the executor on probate and probate fees paid, because those assets still form part of the parent’s estate even though they were owned jointly.
As a result, the parent has exposed him/herself to the issues discussed above, perhaps for no benefit, because probate fees will not have been avoided.
Conclusion
Pecore and the cases that have followed it have created a transformation in the advice to be given about jointly held assets. Legal and financial advisors must pay close attention to their clients’ intentions to determine whether joint tenancy is an appropriate ownership structure, how to properly achieve the desired result, and to advise about the many potential pitfalls. The fact that this issue is one of the most frequently litigated estate-related issues in British Columbia underscores the importance of proper legal advice, whenever joint tenancies are used.
[1] One caveat to this is that assets placed into joint tenancy with spouses, have the opposite presumption – the law presumes that there is a “real” joint tenancy, i.e. that the surviving spouse will take the asset free and clear upon death of the first. Again, this presumption can be defeated by contrary evidence.
[2] Keep in mind that some of the most unfortunate resulting trust cases are those brought while the transferor is still living, where the transferor and transferee have had a falling out and now take differing views of the effect of the transfer, such as Bergen v Bergen 2012 BCCA 492.
[3] In Pecore itself, post-transfer evidence was one of the key components of the Court’s ruling. The facts showed that the father had, after the transfer, made a new will without mentioning the transferred assets to his lawyer. This suggested that the father felt he had already dealt with the account outside of his Will, by intending that it would pass to his daughter automatically, as the surviving joint tenant.
[4] One of the important concepts to come out of Zeligs is the notion that the sale proceeds could, as a “fund”, be subject to the four unities/severance analysis.