Since jointly held assets do not generally form part of the estate of the deceased owner, an obvious planning technique is to place assets in joint ownership. This only makes sense where the surviving joint owner is the intended beneficiary of the asset. Clients must understand that the transfer to joint ownership must be a transfer of the beneficial ownership to be effective for probate purposes as probate are levied against the value of the assets that the deceased beneficially owned at death. Transfers to joint ownership often cause litigation after the death of the transferor because the intention of the transferor was not clearly evidenced and there are doubts to whether the transferor intended to give a right of survivorship to the other joint owner.
If this technique is used to minimize probate tax, it is important to document the donor's intent to convey a right of survivorship. This could be done by a formal deed of gift or by a simple written statement by the donor clearly stating the intent to give a right of survivorship to the transferee joint owner. There are many reported cases where parties have challenged a joint owner's right to retain beneficial ownership of an asset. Two notable cases highlight the pitfalls where a parent attempted to avoid the probate tax on an asset by transferring the asset into joint ownership with one child, effectively disentitling other children from inheriting the assets through the estate.
The cases of Pecore v. Pecore and Saylor v. Madsen Estate both involved transfers by an elderly parent of investment assets into a joint account with one of their children. At the parent's death, the child who was the surviving joint account holder claimed the funds in the joint account for herself. The right of survivorship was challenged by the residual beneficiaries of the estate. Each case was appealed to the Ontario Court of Appeal and then to the Supreme Court of Canada ("SCC"). The SCC agreed to hear the appeals because the Ontario Court of Appeal decisions were not consistent in their application of the presumptions of advancement and resulting trust. The legal presumption of advancement, if applicable, puts the onus on the challenger to prove no gift was intended. The legal presumption of resulting trust shifts the onus to the recipient of the gift to prove a gift was intended. Therefore, the evidentiary requirements that must be met will differ depending on which legal presumption applies in the circumstances. Given the prevalence of joint accounts held by a parent and a child which lead to disputes as to whether a gift was intended by the parent, it is extremely important to know which presumption applies and under what circumstances.
The SCC held that a gift from a parent to an adult child, regardless of whether the adult child is financially dependent on the parent, raises the presumption of resulting trust. This is very significant where a parent puts assets into joint ownership with an adult child. It means that, if challenged, the adult child must prove on a balance of probabilities that the parent intended to make a gift to the child. The presumption of advancement now only applies to gift by a parent to a minor child. The SCC also held in Pecore that the fact that the parent retains control over the account and uses the funds solely for his or her own benefit before death is not determinative of an intent not to make a gift. Such facts are neutral.
What is interesting about the decisions of Pecore and Madsen is that on relatively similar facts, the courts came to opposite conclusions. In Pecore, the daughter was held to have acquired a right of survivorship, whereas in Madsen the daughter could not establish her father intended to gift the funds in the joint account to her. These two cases demonstrate the critical need for clients who choose to transfer assets to one or more children as joint owners to execute some sort of document to evidence their intention with respect to the right of survivorship. In both cases the SCC held that the banking documents which clearly identified the joint ownership carried a right of survivorship were not determinative of the issue.
In Ontario, the 2014 decision of the Ontario Court of Appeal in Sawdon Estate v. Watch Tower Bible and Tract Society of Canada appears to have modified the applicable legal principles established in Pecore. In Sawdon Estate, a father transferred several bank accounts into the joint names with two of his five children, with right of survivorship. Up to the father's death, a charity was a beneficiary of the father's estate argued that the funds formed part of the estate and did not pass to the children outside the estate by right of survivorship. The court had found that the father has intended to create a trust when he transferred the accounts into joint names. Under the terms of that trust, the two children named as joint account holders held the right of survivorship in trust for themselves and the remaining three children. Notably, the court determined that the children were not beneficially entitled to the funds in the bank accounts in question from the time the accounts were put into joint names until the death of the father, and concluded that the father had gifted the right of survivorship without gifting immediate joint beneficial ownership. As a result of the decision in Sawdon Estate, it appears possible to transfer property into joint names, remain the sole beneficial owner of the property until death, and avoid the subsequent application of probate fees to the transferred property.
The 2015 Ontario Court of Appeal case of Mroz (Litigation Guardian of) v. Mroz offers a further insight into the principles established in Pecore. In this case, the testatrix, Kay Mroz, transferred title to her home into joint ownership with her daughter, Helen. On the same day, she executed a new Will in which she bequeathed her "share of the property" to her daughter, Helen, provided that she pay within one year legacies to certain family members. The Will specifically directed that the legacies "shall constitute a first charge on the property" in favour of the legatees. The trial judge held that the presumption of resulting trust had been rebutted but also held that Helen had committed a breach of trust in failing to pay the legacies. The Court of Appeal overturned the trial decision and held that the execution of the Will at the same time as the transfer of the title was registered provided the evidence of intention that Helen acquired title to the property on resulting trust. Kay's share of the property was intended to be source of funds to pay the legacies and thus her share of the property remained an asset of her estate. Sawdon was distinguished because in that case, the testator did not specifically bequeath the bank accounts that had been placed in joint ownership with his two sons. The evidence showed that the testator did not view the bank accounts as assets of his estate and the sons who held the joint interest in the accounts acknowledged that they held the right of survivorship in trust for all of the children of the deceased. All of these cases highlight the critical importance of documenting intention where assets of a parent are placed in joint ownership with one or more children, leaving other children out of the arrangements.
Lastly, a transfer of beneficial ownership will be a disposition for income tax purposes; therefore it is essential to consider the tax implications both on the transfer and after the transfer with respect to income generated from the asset. A transfer of an asset into joint ownership will trigger a disposition of one half of the property for income tax purposes. In Pecore v. Pecore the SCC confirmed this principle.