You may have heard that placing property into joint tenancy is a simple and inexpensive way to avoid probate. While this may be true, joint tenancy also has significant drawbacks. The goal of this article is to shed light on some of those drawbacks so that you can make a more informed decision with regard to joint tenancy when speaking with a professional about your estate plan.
What is “joint tenancy”?
Joint tenancy is a form of co-ownership where each joint tenant holds an undivided interest in the entire property. It is regularly used for real property and bank accounts, although any property can be held in joint tenancy. The distinguishing feature of joint tenancy is the “right of survivorship”, which provides that when one joint tenant dies, the deceased’s interest in the property passes automatically to the surviving joint tenant(s). As a result, property held in true joint tenancy does not form part of the deceased joint tenant’s estate and is consequently not subject to probate fees nor distribution through a wills variation action.
There are situations where placing a property into joint tenancy does not presumptively give rise to the right of survivorship. Most notable of these in British Columbia is when a parent puts property in joint tenancy with her or his adult child. A discussion of such circumstances is beyond the scope of this article; if you have questions on this topic, please reach out to one of our professionals.
What are the downsides of transferring a property into joint tenancy?
By putting your property into joint tenancy, you are surrendering complete control over it. Adding a joint tenant grants the joint tenant ownership rights over the property that are equal to yours. In the case of real property, for example, this means that you will need the agreement of the other joint tenant(s) to dispose of or to mortgage the property. In other words, once you have transferred the property into joint tenancy, there is no going back without the consent of the other owners.
Equally significant to the loss of control is the exposure that results to claims from creditors or spouses of the added joint tenant(s). In Gully v Gully, 2018 BCSC 1590, Mrs. Gully added her son as a joint tenant on real property for estate planning purposes. A few years later, a creditor of the son registered a judgment against the son on title to the real property. Mrs. Gully brought an application seeking a declaration that her son’s interest was held in trust for her, that the transfer was not a gift to the son, and that, as a consequence, the son did not have a right to the property that the creditor could execute against. In addition to finding that the transfer was, in fact, a gift that could be executed against by the creditor, the Court also held that the creditor was entitled to rely on the real property’s state of title naming the son as joint tenant in order to enforce its judgment against the property.
A joint tenant can also unilaterally sever the joint tenancy and convert it into a tenancy-in-common. Severance does not require that notice be given to the other joint tenant(s) and it can occur unintentionally. By severing joint tenancy, the right of survivorship is extinguished and the affected co-owners become entitled to a distinct share of the property (50%, for example). As the right of survivorship does not attach to a tenancy-in-common, the interests of a tenant-in-common will not pass to the other owners on death but will form part of the deceased tenant-in-common’s estate to be distributed according to the deceased’s will or on intestacy rules.
There may also be tax implications when transferring property into joint tenancy. You should consider whether the transfer into joint tenancy constitutes a disposition of property for income tax purposes. You should further consider whether property transfer tax is incurred with respect to a transfer of real property into joint tenancy or whether the principal residence exemption to capital gains tax will apply or continue to apply to your or the joint tenant’s interest in the property.
The above summary is not a complete list of what factors to consider when transferring property into joint tenancy. While joint tenancy can be a useful estate planning tool, it can have significant consequences. As a result, it is important to speak to a professional before transferring any interest into joint tenancy.