The Pitfalls of Owning Property Jointly with Adult Children

Almost every month, I get a phone call or an e-mail from a client asking whether they should add their adult children to the title of their home. Some of these queries are based on information that the client has heard online or through social media or the internet. Before you transfer ownership of your property to your adult children (or add them to the title), you should consult with a lawyer (and an accountant). While it may seem like a good way to avoid probate fees and simplify your estate planning, transferring your property to your children, can have unintended consequences.

Exposure to Creditors

First, you are exposed to creditors of your adult child and his/her Family Property Act claims – Any creditor of your child can register a judgment against the jointly owned property if the creditor has a court judgment . The Canada Revenue Agency can register a lien for non-payment of taxes if the adult child owes income tax. If the adult child owes child support, the Maintenance Enforcement Program can register a judgment against he property. In addition, the child’s interest in the property may be subject to a Family Property Act claim if the child is divorcing his or her spouse.

Inability to transfer interest and loss of control

Upon death, the parent’s portion will go to the adult child not the parent’s estate (with some exceptions as listed below). Once the title has been transferred into joint names, the parent cannot sell or mortgage the property unless the co-owning child or children agree. If the parent wants to transfer the property back into his/her sole name, and the child doesn’t agree, the parent would have to make a court application to transfer the property.

Tax Consequences for parent and child

Any transfer to a parent and child is considered a disposition for income tax purposes and, if the property is not the parent’s principal residence, the parent could be responsible for paying capital gains upon the transfer, even though no money changed hands. Further, any future capital gains would proportionally be the responsibility of the child. If the adult child does not live in the property, the child cannot claim any principal residence exemption for any future increase in the value of the property.

Avoiding probate

Many clients are concerned about probate fees or the time it takes to probate. In Alberta, the probate fees the Court of King’s Bench charges are nominal ($525 is the maximum fee charged) and a grant of probate can be obtained in about 4 weeks. (Read our “What is Probate?” blog post for more information.) Therefore, avoiding probate fees is not a good reason to add an adult child to the title of your property.

Power of Attorney

Another reason clients ask about adding a child to the title of their property is to give the child the power to assist the parent with managing the property and dealing with bills for the property. I do not recommend adding a child tot the tile as a way to help with the parent’s assets. It is much better for the parent to have an Enduring Power of Attorney (particularly a springing power of attorney) appointing their child or children if they need assistance with managing their property. First, an attorney has a fiduciary duty and is accountable for their actions. An attorney must keep records of all transactions. Second, with a power of attorney, the title remains in the parent’s name. Third, a power of attorney can be revoked as long as the donor has capacity.

Estate Issues

There is a presumption at law that a joint tenant who has not made any contribution toward a property holds his/her interest in trust for the owner that has contributed to the property. One exception to this is the doctrine of advancement. Advancement refers to the idea that a gift has been given in advance of a person’s death. There is a presumption of advancement when property is transferred from a parent to a child. The Supreme Court of Canada clarified the rules with respect to advancement and gifts to adult children in 2007 in the Pecore and Madsen cases. In those decisions, the Supreme Court of Canada stated that the presumption of advancement does not apply to transfers between adult children and parents. Therefore, an adult child who receives property via survivorship which was held as joint tenants, must prove that the deceased parent wanted the adult child alone to receive the property and did not want the property to go to his or her estate.

Another issue that can rise is that If more than one adult child is on the title with the parent and one child passes away before the parent, the property will go to the surviving children and the deceased child’s family will not get anything from the sale of the property.

Conclusion

You should consult a lawyer and an accountant before adding a child to the title of your property. It is also essential that if a parent is adding one or more adult children to the title of their property, the parent put their intentions in writing. This will avoid confusion and ambiguity.