Upon passing, whether an individual has a will, or not, real assets (i.e. Real Estate, bank accounts, Registered accounts without beneficiary designations, etc… ) will need to go through probate; the legal process that ensures that one’s will and assets are valid, and that they are properly and fairly distributed. Depending on the size of the estate the probate fees (in BC) can range as little as a $200 fixed fee, or up to 1.4% of the total value.
If you look at the price of an average home, 1.4% is a significant number.
There are different strategies that one can implement in order to try to bi-pass or reduce these costs. With that said, it is very important to ensure that it’s properly structured. One that we come across far too often is for a widow/widower, to put an adult child on title of a property; as joint ownership with right of survivorship. This means that when the parent passes away, full ownership of the house will roll over to the surviving child. This effectively prevents for the property to go through the estate, therefore bi-pass probate. This has been seen to be effective in very specific cases, but we find not many people are aware of the potential dangers of doing so.
Here are some of the inherent risks that one could face:
Immediate & Future Tax Liabilities
If this is not your principal residence, but rather a vacation or investment property… a change in title will trigger immediate tax liabilities, in addition to legal fees. For example, if you acquired that property for $100,000 and now it’s valued at $1,000,000, you have a capital gain of $900K. Half of that gain will be attributed to you, the original owner, as you’ve disposed of half of the interest in the asset. 50% of capital gains are taxable, meaning you would have to include $225K of taxable income to your tax return that year.
In some cases, the adult child will move in to help the parent during the last years of their life. If the adult child already owns a home, their principal residence capital gain exemption could be affected as they now own two properties. This will eventually lead to taxable dispositions when either property is sold.
Multiple Owners – Loss of Control
There are now two owners (potentially more if multiple children are named on title) on the property. This means that in any transaction relating to the property, all owners must sign off on. If you want to sell your home, your child will need to approve and sign off. If you want to leverage your home, or already have a mortgage on your home, not only can your mortgage contract be affected, but it very well could be denied.
Exposure to Family Law and Creditors
If your child acquires title of the property while married or even in a common-law relationship, the asset could be considered family property. If the child faces personal issues like separation/divorce or even financial hardship, your property could be at risk from creditors or a claim from an ex-spouse.
Unfair Distribution of Assets
If in fact you are successful at having your real estate property bi-pass your estate by transferring ownership to one of your adult children, but your intention was for ALL of your assets to be distributed equally amongst your heirs, well, your wish may not be fulfilled.
For example, lets assume that you have a vacation property and two children. If you are successful at transferring true ownership to one child upon you passing, two issues will arise:
- The vacation property is now owned by only one child
- The disposition of the property upon your passing could trigger taxes payable by the estate. The remaining assets in your estate will have to pay for said liability.
Meaning that the second child didn’t receive any interest in the property, and on top of that, their remainder share of the estate would be reduced by the taxes owing.
As you can see, there are some tax and estate planning benefits that can be achieved with proper ownership structures. On the other hand, the above are some of the risks (amongst others) which can arise based on each specific client scenario.
The results can be devastating, and in practice, we’ve found that clients never even consider or knew about these risks before making a decision. It is incredibly important to get the proper legal, accounting, and financial advice before taking such steps. In our collaborative approach at working with our clients’ Legal and Accounting professionals, we are able to dig deeper into these opportunistic strategies while still exploring the risks; so that you can make an educated decision!
There are also alternative solutions which can prevent some of these shortfalls along with enhancing the overall family wealth.
If you have or are considering this type of planning and want to have a chat, please reach out!
