Articles
The Importance of Having a Will
A well thought-out Will allows individuals and families to plan ahead in order to control the ownership and distribution of their assets according to their wishes and preferences. Often times, the main goal and purpose of a Will is to protect loved ones. For example, parents can specify who they wish to have custody of their young children. As well, in situations where children are too young to receive an inheritance, the executor of the Will can be directed to hold each child’s share in a trust fund until they reach a pre-determined age.
Time to Update Your Will?
There are many instances when you may need to update your will. For example, normally marriage revokes a prior will and any gift made to a previous spouse is invalid. Life changes such as separation, divorce, children, change of executor, relocation, or a substantial change in your assets or debts, may necessitate having your will updated.
Choosing an Executor
Choosing an executor is as important as deciding how an estate will be divided. An executor, also called an estate trustee in Ontario, is an estate’s legal representative. The named executor(s) will be responsible for carrying out the instructions left in a Will. Some people prefer to choose a professional trustee, such as a trust company, or a financial institution, to administer the estate. You can also choose one or more individuals and a professional trustee as co-executors. When there is a trust fund set up under the Will, the executors become the trustees of the fund. They can decide how to invest the funds and when and how to pay the amounts designated to the beneficiaries of the trust. Different trustees, however, can be designated apart from the executors, as well as different trustees for different funds. It is important to review these decisions carefully and ensure that you are choosing executors and trustees that you have the utmost confidence in and whom you can trust to administer your estate competently and honestly.
The Pitfalls of Joint Ownership
At first glance a joint tenancy arrangement seems to be a simple and efficient way of avoiding or minimizing estate taxes. This arrangement however, can be more complicated and detrimental than most people realize. The main reason why people often transfer a property into joint ownership is to minimize their estate administration tax, or “probate tax” as it is commonly referred to. When property is held as joint tenants, it passes directly to the surviving joint tenant by right of survivorship. As a joint asset, the property will not form part of the deceased’s estate and the disposition of the property falls outside of the Will.
Usually for most spouses, if creditor protection is not a factor and the intention is to have everything pass to the surviving spouse, then joint tenancy is an obvious choice. All that is required is the registration of a survivorship application in order to transfer title into the surviving spouse’s name. If one spouse may be subject to the claims of creditors, such as owing a business, then joint tenancy is not a good option since this could result in half the value of the property placed at risk in order to satisfy creditors.
Parents frequently transfer their property into joint tenancy with their adult children in order to avoid probate taxes on the value of the property. This course of action is not usually advisable or prudent. Rather than streamlining the process, joint tenancy with a child serves to complicate matters in several ways, for example:
a) Loss of Control: The parent will not be able to sell, transfer or mortgage the property without the child’s consent. The parent may want to sell the property and use the proceeds to downsize with enough equity left over to live comfortably. This plan may be impeded if one or more children are on title to the property and expect to receive a share of the proceeds from the sale.
b) Claims of Creditors and Family Law Claimants: If the joint owner is facing financial difficult, the property becomes subject to possible claims of the child’s creditors. Additionally, the child’s interest in the property may have to be included in his or her net family property in the event of separation, divorce or death. This is a consequence of joint ownership that many people do not foresee.
c) Capital Gains: If the property has accrued capital gains (ie, not a principle residence), transferring the property into joint ownership could result in a deemed disposition of the property and a triggering of capital gains. If the property is the parent’s principle residence and the child is added as a joint owner, but is not the child’s principle residence, the child’s share of the property will be subject to capital gains tax. If the property significantly increases in value, transferring the property into joint tenancy to avoid probate taxes will backfire since the capital gains tax can potentially exceed the probate tax that the parent was trying to avoid in the first place!
d) Conflict with estate plan: Usually if a child predeceases the parent, the wish is to have that child’s share of the parents’ estate pass equally to the children of the deceased child. However if title is held by parent(s) jointly with more than one child, and one of the children predeceases the parent(s), there is no legal obligation on the surviving children to share with the children of the deceased child. As well, title may be held jointly with one child in order to avoid probate, but the intention may be that the property will be divided among all the children equally upon the death of the parent. The child who is on title may argue that the property was intended to pass to him or her solely. Suddenly, the siblings find themselves in litigation over a matter that could have been avoided with careful planning, thought and consideration.
Always discuss with your lawyer the advantages and disadvantages of having jointly owned assets. Consider the risks carefully before you give up control of your assets and document your intentions clearly to avoid any conflict and confusion among your surviving beneficiaries.
