This is becoming one of the more common questions asked by our clients in recent years. A person or couple’s home, if owned, is often one of their largest assets, so people look for ways to limit the probate due on these assets. But you have to be very careful about putting an adult child as a joint owner because there can be some serious consequences.
1. A principal residence is one of the few assets that gets preferential income tax treatment, so losing this potential benefit is something you want to avoid. In most cases, the child will not be eligible to claim the house as their principal residence, so there may be income tax consequences for them. From the time an additional person is listed as a joint owner, he or she becomes legally liable to pay capital gains tax when the home is sold. Not something that most people would anticipate.
2. If your child is listed as a joint owner on your home, the equity in the home becomes available to the child’s creditors. In other words, if your child gets into financial difficulty their creditors may come after your home’s equity for payment. This can be particularly problematic if the child goes through a divorce. The child’s spouse could demand to be paid some of the equity in the property during the divorce.
3. As a joint owner, your child can actually prevent you from selling the property. Since they legally have to sign the deed of sale, you may not be able to liquidate this asset to pay your living expenses in the future.
4. If there are other beneficiaries of your estate listed, they may not receive what you intended when you wrote your will. Since assets held in joint ownership with right of survival pass outside of the will, the value of the house would all go to the remaining joint owners, and the other beneficiaries of the will would not receive their share.
We also want to remind you that probate in Ontario is not a huge percentage of an estate. Probate is a mere $250 on the first $50,000 of assets, and just 1.5% after that. Income taxes, on the other hand can be as high as 53.53% of the estate if it is not properly constructed.
If you haven’t addressed estate planning, we absolutely encourage you to do so. The bottom line is that you should always get good professional advice when organizing your estate. Talk to your lawyer, accountant, and financial advisor before making any decisions.