ESTATE PLANING TOOLS – II
Previous post discussed wills, which are the basic tool and should be in place for all estates if for nothing else then to appoint the executor to avoid delays and additional applications to the court in order to deal with the estate. The will may be the only estate planning one might need, but sometimes it is beneficial to implement other strategies in addition to the will.
For example, real estate, irrelevant of its value, always requires probate. In certain circumstances it may be desirable to transfer real estate into joint tenancy with the right of survivorship during the life time of the testator so that when the testator dies, this real estate does not become a part of the estate and the joint tenant automatically becomes the sole owner. Other consequences of such transfer, including property transfer tax (the “PTT”), should be considered before it is implemented.
An aging person may transfer an asset to his or her heirs during their lifetimes, however, that would mean they will lose the right of the ownership and control over the asset. Sometimes it works and sometimes the original owner wishes to retain the ownership during their life. There is no need to transfer the asset to someone else outright in order for that asset not to form a part of the estate, which will be subject to the probate tax.
It may be useful to create a joint tenancy with a number of joint tenants when for PTT and income tax purposes only part of the asset will be considered transferred from the original owner: ½, 1/3 or any other part depending on the number of joint tenants desired to inherit the asset. The PTT will be payable on a part of the value of the property depending on how many joint tenants there are. Also, depending on relations between the original owner and a new joint tenant, there may be an exemption from the PTT available under the Property Transfer Tax Act. For example, transfers to children are exempt from the PTT.
It is also possible to create a legal but not beneficial joint tenancy. In this instance it is very important to document intentions of the transferor. Where joint ownership of an asset results from a gratuitous transfer of an interest in the asset from the original owner to a joint tenant (from a parent to a child, for example), the courts have stated that succession to the jointly held asset will depend on the intention of the transferor (the “Transferor”) at the time the interest in the asset was transferred to the joint tenant (the “Transferee”), as follows:
- Where the Transferor intends for the Transferee to share beneficial ownership of the asset immediately and to receive the whole of the asset on the Transferor’s death, the asset should pass to the Transferee by right of survivorship on the Transferor’s death;
- Where the Transferor intends to retain beneficial ownership of the asset during his or her life and has gifted an interest to the Transferee either to assist with managing the asset or to avoid probate fees, but wishes for the Transferee to receive beneficial ownership of the asset on the Transferor’s death, the asset may pass to the Transferee by right of survivorship on the Transferor’s death;
- Where the Transferor does not intend to gift either immediate beneficial ownership of the asset or beneficial ownership on the Transferor’s death to the Transferee, the Transferee will hold the asset on a resulting trust for the benefit of the Transferor’s estate.
When determining whether the Transferee is entitled to the asset by right of survivorship, the court will weigh all the evidence surrounding the transfer. Such evidence will include all parties’ statements and notes, statements and notes of the lawyer the parties consulted. If the court is unable to determine the Testator’s intent at the time of the transfer, unless the Transferee is the Transferor’s minor child or a spouse, a presumption will arise that the Transferee holds the asset on a resulting trust for the benefit of the estate. The onus then will lie with the Transferee to establish on the balance of probabilities that the Transferor did intend to gift to the Transferee a right of survivorship in the asset.
- Simple – Property held in joint tenancy with the right of survivorship passes to the surviving owner;
- Not part of the estate – no probate, probate fees or public disclosure;
- Loss of control;
- Exposure to creditors;
- May result in unequal distribution (for example if the property is owned as joint tenants by a parent and 2 children and parent dies after one of the children died: the surviving child will receive the entire property, the deceased child’s family will receive nothing);
- Transfer of partial interest is subject to, unless exempted:
- Income tax;
- Property Transfer Tax