Caution: Real Estate Transfers To Avoid Probate
I frequently receive phone calls from people that are looking to add a child or children to Title to their home in order to avoid paying Probate Fees (“Estate Administration Taxes” are approximately 1.5% of the value of a deceased’s person’s estate). When I ask the person on the other end of the line who suggested this to you, the answer is almost always one of: a child, a banker, a lawyer, an accountant or an investment advisor. In fact, on several occasions while standing in line at banks, I have heard bank tellers suggest this estate planning strategy to their customers.
The people making this suggestion have great intentions; they are simply trying to help avoid some taxes. The strategy sounds simple enough: Parent puts child on Title to their home as Joints Tenants. Then when the parent passes away, Title to the home transfers to the child by right of survivorship. Voila, the home is no longer part of the deceased’s parent’s estate; therefore, the value of the home does is not to be included in the Estate Administration Tax calculations.
The problem is that the people suggesting this estate planning strategy do not work in the area of estate planning law and simply do not know of the disastrous affects that result of implementing this type of estate planning strategy.
In order to help you make an informed decision whether this type of strategy is right for you, this post will outline some of the potential problems that occur as a result of adding your child to Title to your home.
Loss of Control of Your Home
When a child is added to Title to your home, you no longer have complete control of the property. The child is now a part owner of the property. The child is now required to “sign off” on anything you want to do with the property. If you want to rent, mortgage or sell your property, the child must agree. The child will have to sign paperwork required of the transaction.
Not only can the child refuse to sign paperwork thereby preventing you from doing anything with the property. The child that is now on Title can actually force the sale of the property. Under the Partition Act, in Ontario, your child could commence an application to force the sale of your home.
Family Law Act
Potential Family Law Act claims by a spouse that is separating or seeking a divorce from your child. For instance, if you have added your child to Title of a cottage and your child and his or her spouse spend time at the cottage together, this could make the cottage a “Matrimonial Home” of the separating or divorcing spouses. When a property is found to be a “Matrimonial Home”, both spouses, regardless of who is on Title, have certain rights to the property.
Because the child is now a part owner of your home, your child’s creditors can force the sale of the home in order to satisfy your child’s debts. Parents often have no idea of their adult child’s financial state of affairs. Whether it is out of embarrassment or deceit, children do not always tell their parents that they have or will have creditor issues. Further, sometimes children are financially stable when they are added to Title but later, they experience a “rough stretch” with their personal finances for any number of reasons: a lost job, illness, injury, divorce, failed business, etc. It is important that both you and your child know that creditors can force the sale of your home to pay for your child’s debts.
There can be tax consequences to both yourself and your child. When a child is added to Title of your property, this is a disposition for tax purposes. This may trigger unexpected taxes for yourself. For your child, Capital Gains begin to accrue once your child is added to Title. If there is no exemption available when your child disposes of the property, your child will be responsible for any increase in value from the time he or she was added to Title until the time the child disposes of the property. This has the potential of resulting in far more taxes under the Income Tax Act than taxes saved under the Estate Administration Tax Act.
Unintended Consequences for The Estate Plan as a Whole.
In many cases, the parent’s home is the most significant asset of the estate. When transferred into Joint Tenancy, the value of the home is no longer available to satisfy things such as funeral expenses, tax liabilities or gifts upon the parent’s death.
I hope this post encourages you to speak with an estate planning professional about your entire estate plan before transferring any of your property simply to avoid probate fees. I do not like hearing stories of people rushing to save cents now only for it to cost them dollars later.
I offer a free consultation to discuss your estate plan so please do not hesitate to contact my office.