There are two distinct ways in which one can own property with another person:
- tenancy in common; or
- joint tenancy.
The main difference between the two can be explained by imagining two people, Person A and Person B, who want to own a piece of property (P) together.
If A and B hold Property P as tenants in common, each owns a part of the property. For example, Person A owns 50% and Person B owns 50%. When Person A dies, A’s 50% of the property would generally form part of A’s estate and be distributed according to A’s will.
If A and B own Property P as joint tenants, each is said to have an “undivided interest in the whole”. In a sense, they both own 100% of Property P. If the joint tenancy were severed (turned into a tenancy in common) then each would usually have a right to 50% of the property. However, if they own as joint tenants, they may benefit from one of the defining features of joint tenancy, the right of survivorship.
The right of survivorship means that if A and B own Property P as joint tenants, and Person A dies, B (the survivor) simply continues to own 100%. Because of this, in the right circumstances, joint tenancy can be very useful estate planning tool. However, as with any tool, its use is only appropriate in some circumstances and may create risks.
The right of survivorship allows a jointly held asset to remain in the hands of the surviving joint tenant when the other tenant dies. Generally, this means that the asset will not form part of the estate of the deceased tenant, and will thus not be subject to probate fees.
If all of one’s assets were held jointly, there may be nothing in one’s estate when one passes – everything would then go by right of survivorship to the surviving joint tenant instead. This type of arrangement can, if carefully planned, avoid the cost of obtaining a grant of probate and paying probate fees.
Having nothing in one’s estate that is to be distributed by one’s will may also help to prevent wills variation claims made under the Wills, Estates, and Succession Act.
It is relatively common for spouses in their first marriage or common law relationship to own all or much of their property as joint tenants. This may create a situation in which, when the first of them passes, the survivor does not need to obtain probate, or the cost is lessened if probate is necessary. This can be quite beneficial for a surviving spouse.
It is also quite common for a surviving spouse to consider naming his or her adult child(ren) as joint tenants of the surviving spouse’s assets. Often the surviving spouse considering doing this comes to us unaware of the risks that doing so may pose. While owning assets jointly with one’s adult children may avoid probate costs and wills variation claims when one passes, it can create significant risks while one is alive.
It is a Permanent Decision
If one transfers one’s property into joint tenancy with one’s adult children, one generally cannot later change one’s mind and regain full ownership and control over the property. On the other hand, if one leaves one’s assets to one’s children in one’s will, one can later change the will if one so chooses.
There is a loss of control
Putting property into joint tenancy with another person can lead to a loss of control over the property. For example: if Person B is a surviving spouse, Property P is a residence or vehicle, and B puts Property P into joint tenancy with Person C (B’s adult child), then B will be unable to mortgage or sell Property P unless his or her child, C, consents.
Exposure to Creditors
If C were named as joint tenant, any creditors of C would generally be able to claim against C’s interest in Property P. This could include creditor claims due to credit card or other consumer debt, civil judgments (e.g. damages resulting from an accident), or family law claims (e.g. family property division and spousal or child support claims).
If Property P is a residence, C’s creditors may be able to force a sale of Property P to satisfy their claims. This could result in the surviving spouse, B being forced to vacate and sell their home or buy 50% of it back due to the debts of their adult child. This can cause significant hardship for B. It can be a particularly unfortunate outcome if B is relying on Property P as a residence, is on a fixed retirement income, and is in declining health.
There may be Tax Consequences
There may also be income tax consequences if B transfers Property P into joint tenancy with C. Person B will usually be regarded, for income tax purposes, as having transferred a 50% interest in the property to C at fair market value. This may trigger capital gains tax consequences for B.
Unless Property P is B’s primary residence, B may be required to pay tax on the deemed capital gains, even though C did not pay B and B and did not actually realize any actual capital gains. Property transfer tax may also be payable due to the transfer.
Putting an asset in joint tenancy with an adult child may not, on its own, be enough to ensure that the child will be able to keep the asset without further steps.
Even if one makes one’s adult child a joint tenant of an asset, this may not be, on its own, sufficient to ensure that the right of survivorship will apply. This is because of a presumption of law known as the presumption of resulting trust. Stay tuned for next month when we will discuss the presumption of resulting trust, the related concept of the presumption of advancement, and the importance of documenting one’s intentions when making gifts to people other than one’s spouse or dependant children. Read more about the Principle of Resulting Trust.
Questions? Get in Touch
Please let us know if you have questions on this subject – we are happy to help.