One of the main reasons people consider putting their child on title is to avoid probate tax.Nuthawut Somsuk/Getty Images
Rising housing costs and a sharper focus on estate planning have aging parents wondering if they should add their adult children to their real estate title before they pass away – a move that could help the asset bypass probate.
However, advisors say the strategy comes with risks, such as parents losing control of the property, feuds between siblings and potential tax implications, and requires careful consideration.
“Parents should ask themselves, ‘What do I hope to accomplish by putting my child on title with me?’” says Akua Carmichael, vice-president of estate planning and services at Estate Stewards Inc. in Toronto.
“And looking at my other assets, is putting my child on title going to frustrate my estate-planning goals, or will it help me accomplish them? It’s really about understanding some of the potential consequences and whether you’re comfortable with them.”
The pros of putting children on title
Ms. Carmichael says one of the main reasons people consider putting their child on title is to avoid probate tax, which is levied on an estate by the provincial government at death. Probate is highest in Nova Scotia (1.7 per cent), followed by Ontario (1.5 per cent) and British Columbia (1.4 per cent).
Probate tax can be avoided by designating beneficiaries for certain assets and owning property jointly with one or more people with a “right of survivorship,” which means that when one owner dies, the surviving owner(s) remains on title and inherits the deceased owner’s share automatically.
Another option is creating a trust in which the parent is the trustee and the beneficiary during their lifetime. Upon the death of the last surviving spouse, the assets are distributed according to the terms of the trust, bypassing probate. A trust also allows parents to maintain control of the asset while they’re alive.
Ms. Carmichael says parents can also create separate wills for probate and non-probate assets, but notes the option is implemented more commonly by people living in B.C. and Ontario.
Avoiding probate is a major consideration because the principal residence is often the largest asset in a family, says Leanne Kaufman, president and chief executive officer of RBC Royal Trust.
She says adding adult children to the title while alive can also simplify the estate.
“If it’s joint tenancy, it’s a very simple transfer: You register on title the death certificate of the joint owner and 100 per cent vests in the name of the surviving joint owner – as long as it’s right of survivorship,” Ms. Kaufman says.
If the asset is transferred after death, it could be subject to probate, she says, which, even if the fees aren’t as high as they are in Ontario and B.C., can take several months to complete.
Beware of family feuds
Ms. Kaufman says some parents put in their will that they want to distribute their assets equally to their children, with no specific rule about what should happen to their real estate, which can lead to disputes.
“It’s up to the executor or the beneficiaries to decide what they’re going to do with it, which can be pretty emotional,” she says.
Parents who plan to leave their property to one child need to specify that in their estate documents, she says, even if that child is on title.
She points to the 2007 Supreme Court of Canada decision, Pecore v. Pecore, which changed the legal framework for how certain joint tenancies are treated. The court ruled that when a parent transfers property to an adult child as a joint tenant and there are other children listed as beneficiaries of the estate, the child on the title is presumed to be holding their share in trust for the estate.
“It should be documented, whether it’s a gift or whether it’s being put into a child’s name for convenience purposes or probate avoidance … because other siblings could say, ‘That was never meant to be just for you and we’re all sharing in the estate,’” Ms. Kaufman says.
Losing control
Ms. Kaufman cautions parents that putting adult children on title will mean relinquishing full control of the assets.
“It’s no longer available to the parents to dispose of as they wish or when they wish,” she says.
For example, she says parents may need to use the proceeds from a home sale to pay for a retirement home or long-term care facility.
“It may impair their ability to make that decision,” Ms. Kaufman says.
Adding kids to a title could also trigger capital gains for the parents at the time of transfer if it’s a secondary residence, such as a cottage. If it’s a parent’s principal residence, but the secondary residence for the child, the child would likely be subject to capital gains down the road when the property is sold.
Carol Willes, director of estate planning for BMO Private Wealth, notes that another risk of joint tenancy for parents is that it exposes the asset to creditor claims that the adult child may have. That may be because of financial mismanagement or professional liability, depending on their career.
Also, if the child is married or in a common-law relationship, the property could become part of a claim if there’s a divorce or separation.
Ms. Willes notes spouses can agree to avoid property division through a separation agreement, cohabitation agreement or marriage contract. However, she warns these options might create tension if the child is added to the title when they’re already in a relationship, and one of those agreements is then drawn up.
“Sometimes, after the fact, it can become more contentious,” she says.
Another option, Ms. Willes says, is for the parents to put the adult child’s portion in a bare trust to protect the asset from legal claims and potentially avoid probate.
Parents who put adult children on title can also consider a co-ownership agreement that details each person’s obligations and responsibilities. These could include who’s responsible for payments related to upkeep, maintenance and taxes if the child is expected to shoulder some of the responsibility, Ms. Carmichael says.
“A parent is giving up control of their property, and will require consent from their co-owner adult child to avoid conflict when dealing with it in the future, including selling, mortgaging or leasing the property,” she says. “A co-ownership agreement can address these issues and more.”
Editor’s note: A previous version of this article stated that Ontario had the highest probate rate. In fact, Nova Scotia has the highest rate at just under 1.7 per cent.