As people begin to think about estate planning, joint ownership with their adult children is often something people want to think about. After all, joint ownership saves taxes on death, right? Not always.
A common misconception is that adding your adult children to your principal residence deed saves tax on your death. This is partially true, but there is more to it. Owning a residence as joint tenants on your death means that the residence passes to the surviving joint tenant by right of survivorship. Therefore, estate probate taxes are saved. If you hold the property as joint tenants with your spouse, this was likely a good move and saved you taxes.
However, if you held the principal residence as joint tenants with an adult child, you likely have not saved any taxes on your death at all, but rather incurred higher taxes, namely in capital gains. As most people are aware, your principal residence is exempt from capital gains tax on its sale. When your principal residence passes onto an adult child on your death, and the property was not the child’s principal residence, you have forfeited that exemption. On its sale your child will have to pay capital gains tax, which is likely much more significant than the estate administration tax you saved by adding them to title in the first place.
Another misconception is in regards to adding children as joint account holders on your bank accounts. By adding your children to your bank account, the bank account will flow directly to your child on your death, right? Wrong. The law in Ontario presumes that if you hold a joint bank account with an adult child, you held this for convenience only, and that the funds in the account are meant to form part of the residue of your estate and not flow directly to that adult child.
Often parents add children to joint bank accounts when they are elderly and want to make it easier for their child(ren) to pay their bills and do their banking for them. However, as you read above, this can get messy and confusing on your death if you have more than one child or other beneficiaries under your Will. It often sparks debate and argument as to who the funds in the joint bank account belong to. A good solution to this problem is name your child(ren) as Power of Attorneys for your Property, and then should you become incapable, your child(ren) can freely access your banking with a valid Power of Attorney, without being named as joint account holders.