Tuesday, 30 March 2021

The Pitfalls of Using Joint Ownership as an Estate Management Strategy

 By Lydia Roseman

One of the goals of estate planning is the management of assets while an individual is still alive but has lost the ability to manage their assets on their own (commonly referred to as losing capacity). We recommend coming up with a plan as to who will manage your assets, and how, long before capacity becomes an issue.

Commonly, an individual getting close to this stage and wanting help managing their assets will simply add a child, or another trusted individual, as a joint owner of their assets. While this may seem like a simple solution, this strategy is rife with issues.

This article will address some of the issues with using joint ownership as a strategy for managing assets, both during the original owner’s life and upon their passing. It will then discuss an alternate asset management tool: the Enduring Power of Attorney or “EPA”, a specialized legal document designed for precisely this situation.

Joint Ownership

    Issues during the original owner’s life

What do we mean by joint ownership? Joint ownership occurs when assets are held jointly in two or more individuals’ names. For example, if a senior individual has a bank account and adds their child to that bank account, they will become joint owners.

While the intent of this might simply be to allow the child to pay bills on their behalf or make deposits or withdrawals, the reality is much more complicated. Once both names are listed as “owners” of the account, the legal assumption is that the account is equally owned by the two individuals. The child then has equal authority to deal with those funds. There is no automatic requirement that the child must use the funds solely for the benefit of the parent.

This means that the child could theoretically remove all funds from the bank account and it would be very difficult or impossible for the parent, or another interested party, to reverse these transactions.

Joint ownership also opens the asset to potential claims of third parties as against the additional owner. For example, if the joint owner declares bankruptcy, creditors may be able to realize against the asset held jointly. Or, more commonly, if the joint owner goes through a divorce (or a separation from an adult interdependent partner), their partner may have a family property claim against the asset.

It is also extremely difficult to undo the joint ownership as a whole. Once you have added someone to your bank account, or title of your house, you cannot simply elect to remove them without their consent. For all intents and purposes, they are an equal owner of the property.

Finally, it can take significant time to transition all of one’s assets into joint ownership. There is no one call to make or form to submit to add another individual as a joint owner on all of one’s assets. Each bank account, house, vehicle, or other investment or physical asset would need to be dealt with individually.

    Issues following the original owner’s death

The other point to consider is what will happen to the assets held jointly upon the original owner’s passing.

Once the original owner passes away, the “right of survivorship” applies to make the other named individual the sole owner of the asset. This means that the funds in the account will not form part of the deceased’s “estate” and will not be distributed in accordance with the Will. Instead, the property will become entirely the property of the joint owner.

This means that an individual using the joint ownership strategy can unintentionally cut a beneficiary out of a very substantial part of their estate.

It may be possible for the remaining beneficiary(ies) to argue before the Court that the deceased’s intent was not to leave the asset entirely to the named individual but rather that the funds are held in trust by that individual for the estate. However, without some written documentation of the testator’s intent, this can be an extremely challenging argument to make. Even if the spurned beneficiaries are ultimately successful, this would mean a lengthy and expensive court battle and unnecessary conflict between beneficiaries.

As the old saying goes, only two things in life are certain, death and taxes. But what does death mean for taxes when property is held as joint owners?

Let’s use the example of an individual with two children whose substantial assets are a house and a bank account, both of which are worth roughly the same value. The individual decides to put the house in both his and his daughter’s names so that the daughter can help with management of the house. To compensate for this, the individual is leaving the entirety of the contents of the bank account to the son in his Will.

Upon the individual’s passing, Canada’s tax rules deem the testator to have sold the house at its current fair market value. There will likely be a large capital gain on the house, assuming it has gone up in value since its purchase. These tax consequences will belong to the deceased’s estate; they do not attach to the house.

This means that there will likely be a substantial tax burden that must be paid out the estate’s remaining property, i.e. the bank account. The end result is that the daughter gets the full value of the house without paying any of the tax consequences, while the son is left only with the funds in the bank account after the taxes have been paid. The tax consequences could erode a substantial portion of the value left for the son.

This leads to the unintentional result of a very unequal division of assets.

The Enduring Power of Attorney

An EPA is a legal document under which an individual appoints an attorney to manage all their assets. The EPA is drafted by a lawyer and is signed by an individual either to immediately take effect or to take effect at some later date, once the individual has lost capacity.

We typically recommend drafting these documents well in advance of loss of capacity with a future “triggering event” which will bring the EPA into effect. This “triggering event” can be a statement in writing of the testator intentionally bringing the document into effect, or it can be a statement from one or more doctors that the testator no longer has capacity to deal with their assets.

Following the coming into effect of the EPA, the attorney is able to manage all of the owner’s assets. The most important benefit is that the EPA will not affect the underlying ownership of the assets. While the attorney has the ability to manage the estates, dispose of them, buy new investments, etc., everything remains the property of the original owner.

Further, the attorney owes a fiduciary duty to the original owner meaning that the assets must be managed solely for the benefit of the original owner.

There are also clear mechanisms for the individual, or other family members or interested parties, to bring forward an application to the Court if they believe that the attorney is mismanaging the funds. The attorney is statutorily obligated to maintain records of how they have dealt with the assets and the EPA can even build in reporting requirements whereby the attorney has to keep other family members appraised of his or her decisions. There is therefore much clearer and more substantial protection for the original owner.

It is also possible to undo the coming into force of an EPA. For example, if an individual temporarily loses capacity due to a car accident, the EPA could come into effect. However, once that individual regains capacity, if a medical professional declares that individual competent, that individual can regain control over their assets.

Finally, the EPA will not impact the distribution of property on the individual’s passing. As the assets never become the attorney’s property, the assets will entirely be dealt with under the deceased’s Will. This avoids unintentional unfairness between beneficiaries.

Conclusion

In conclusion, there are many potential issues when it comes to using joint ownership as a tool for asset management. The joint ownership strategy puts the original owner at the mercy of the joint owner, is almost impossible to unwind, and can lead to unintended consequences for the ultimate beneficiaries of the individual’s estate.

We therefore strongly recommend using an EPA as an estate management tool instead of relying on joint ownership. While there is some up front cost to preparing an EPA, it gives the individual much more control over how their assets will ultimately be managed. Importantly, there are significant built in protections which require the attorney to manage the assets for the benefit of the individual. Finally, the EPA does not impact the underlying ownership of the assets avoiding any unintended consequences upon the individual’s passing.

Our Wills & Estates team would be happy to prepare an EPA for you and to answer any questions you may have. Remember, it is never too early to start thinking about estate planning.

Wednesday, 14 October 2020

Planning for Death in Business: Capital Dividends and Unanimous Shareholders Agreements

By Michelle Fong and MaryAnne Loney

Making a plan for the storm when the weather is still good is the fundamental basis of estate planning and business succession planning. It allows everyone involved to set out their intentions, have open and clear communications, and set a plan in place that they feel will allow their successors to succeed.

One of the key tools used for this planning is a unanimous shareholders agreement (“USA”). Where estates and businesses intersect is often in the buy-sell options upon death and life insurance clauses in a USA.

The buy-sell upon death clause typically requires the estate to sell the shares of the corporation back to the corporation at a fair or agreed price. But how will the corporation fund the repurchase? That is where life insurance and capital dividends come in.

Corporations may take out life insurance on the lives of the shareholders. Upon the death of a shareholder, the insurance proceeds will be paid to the corporation and be added to the capital dividend account balance.[1] The capital dividend account represents amounts that a private corporation[2] may pay out to shareholders as tax-free dividends, called “capital dividends”.[3] The capital dividend account is maintained “on-paper”. It is not a dollar balance that appears on financial statements or tax returns.

The corporation will then use the insurance proceeds to repurchase the shares. However, in fairness, the corporation should elect that the addition to the capital dividend account as a result of the insurance proceeds should be used to repurchase the shares. This allows the estate to then receive those funds as tax-free capital dividends. If the life insurance proceeds are insufficient to cover the entire repurchase price, the difference will usually be treated as a taxable dividend.

This is helpful for the corporation, as it provides a means to deal with the shares of deceased shareholders, and it is helpful for the estate, as it provides a tax efficient way to deal with the shares of a private corporation.

However, unless a USA obligates the corporation elect that capital dividends be paid out as part of the repurchase, under corporate law, the corporation can theoretically keep the capital dividend account balance for the other shareholders, leading to significantly worse tax results for the estate. Since this is usually not the parties' original intention, this regularly leads to expensive litigation.

Therefore, when estate planning for individuals who own shares in private corporation, not only will the individual’s will be important, but also a USA for the corporation. You should contemplate including in a USA clauses that:

1.    require or permit the corporation to maintain life insurance on the lives of the shareholders;

2.    gives the corporation an option to repurchase any shares owned by the deceased shareholder at the time of his/her death from his/her estate;

3.    set outs a formula or definition for the repurchase price for the above-mentioned option that is reasonable for both the estate and the corporation;

4.    sets out that the repurchase price paid will be designated as a capital dividend to the extent that the capital dividend account balance was increased by the receipt of life insurance proceeds related to the deceased shareholder.

It is worth remembering that the cost of establishing a proper USA prior to death can save the estate and corporation significant litigation and/or tax costs after death. McLennan Ross has an experienced and talented Wills & Estates Team as well as a skilled Tax Team able to assist you with estate and business planning and its related tax implications.



[1] Income Tax Act (“ITA”), subsection 89(1). Other items that are included in the capital dividend account include the non-taxable portion of capital gains, and capital dividends received from other corporations.

[2] ITA, see definition in subsection 89(1). Generally, a Canadian resident corporation and not controlled by one or more public corporations, prescribed federal Crown corporations, or any combination thereof.

[3] ITA, section 83.

Thursday, 30 July 2020

Were My Parents Right? – Implications of the Family Property Act

By Moe Denny

My parents have always harped about not moving in with a partner until we’re married. Recent changes to the Family Property Act (the “Act”), suggest they may have been on to something as long term dating may trigger entitlement to property.

The Act, which replaced the Matrimonial Property Act, governs the division of property when a relationship breaks down and makes all property subject to “division” unless it is exempted by legislation or it is excluded by agreement. 

The former Matrimonial Property Act applied only to “spouses”; however, the Act now applies to both “spouses” and “adult interdependent partners” (“AIP”), which means that a wider group of individuals are captured under the legislation.

So what is an AIP? Generally, people become AIPs when they live together in a relationship of interdependence:

  • for a continuous period of 3 years or more; or
  • of some permanence, if there is a child of the relationship by birth or adoption;[1]

Generally, a relationship will be deemed interdependent when two people are not married to one another but still share one another’s lives, are emotionally committed to one another, and function as an economic and domestic unit.

A few things that AIPs can apply for though the Act include:

  • a family property order to have property distributed;
  • exclusive possession of a family home and/or exclusive use of household goods; and
  • disclosure of property.

For the most part, division of property under the Act is based on the market value of the property and not the actual physical property, which means you won’t be splitting or sawing anything in half, but rather giving the fair market value of the property. The applicable date when market value is calculated is either the date the relationship of interdependence began, or the date the AIP acquired the property (whichever is later).

The Act does exempt certain property’s market value, such as property acquired by gift from a third party (like parents), property acquired by an AIP by inheritance, and property acquired by an AIP before the relationship of interdependence began.

All this considered, gifts from third parties (parents) to a person (child) are exempt property, meaning that the value of the property from latest of the date of receipt, or the date the relationship became an AIP is exempt. However, increases in value from such date are not exempt.

Why does this matter? One of the main differences between marriage and an AIP relationship is that marriages have a notable (and hopefully memorable) start date. AIP relationships are based on cohabitation[2], which can occur early in a relationship and then the 3rd anniversary of cohabitating can pass without much fanfare. The date that determines what value is exempt and what value is subject to family property division is the date that the cohabitation starts (not the 3rd anniversary, meaning property entitlement back dates to the move-in date).

Thus, before you move in with your partner, you should consider whether you’re willing to have property divided in the event of a break down of a relationship. Not only that, but keep in mind that the Act introduces and subjects AIP relationships to a full regime of property division and disclosure.

Third parties (such as parents) should also take stock of their children’s relationships being that if it becomes an AIP relationship, it may have implications on succession or estate plans, just like they would if their children were about to get married.

If you wish to discuss the above or any of your Wills & Estates needs, please contact Crista Osualdini, Moe Denny, or Michelle Fong. As necessary and in light of the circumstances, our Wills & Estates team is available to assist you on evenings and weekends and will work to accommodate your schedule and circumstances to ensure that you are properly prepared.



[1][1] Or, if they enter into an AIP agreement.

[2][2] Or an AIP agreement.


Wednesday, 24 June 2020

Update: Remote Witnessing and Signing of Estate Planning Documents



On June 18, 2020, the Government of Alberta introduced Bill 24, the COVID-19 Pandemic Response Statutes Amendment Act, 2020 (“Bill 24”). In our news release of May 27, 2020, we highlighted a concern that had arisen in the provisions of Ministerial Order 39/2020 (“M.O.”). The M.O. authorized the remote witnessing of Wills, Enduring Powers of Attorney, and Personal Directives in light of the COVID-19 pandemic where public health recommendations for social distancing placed significant restrictions of the ability of lawyers to meet with their clients to execute their estate planning documents in person. Once put into practice, it came to light that the M.O. would not authorize the execution of Wills in counterpart. 

This issue has been addressed by the introduction of Bill 24, which amends several pieces of provincial legislation, chief among them the Personal Directives Act RSA 2000 cP-6, the Powers of Attorney Act RSA 2000 cP-20, and the Wills and Succession Act, SA 2010 cW-12.2. These amendments define “deemed presence”, stating that persons are deemed to be in each other’s presence while connected by an electronic method of communication in which they are able to see, hear and communicate with each other in real time. Once Bill 24 is passed, it will be possible to execute estate planning documents remotely in Alberta utilizing video conferencing. 

The Wills and Estates team at McLennan Ross LLP are well-equipped to advise clients on their estate planning needs, as well as to meet remotely to execute estate planning documents safely during the COVID-19 pandemic.