Thursday, September 6, 2007

More Confusion About Joint Accounts With Adult Children

In popular mythology, joint accounts are supposed to be simple. In actual fact, they are fraught with difficulty. This year, the Supreme Court of Canada had to pass judgement on two occasions about the ownership of funds in joint accounts. That such a supposedly simple matter ended up in the country’s top court twice in the same year speaks to the uncertainty that surrounds joint accounts.

Why the uncertainty? Joint accounts serve different functions for different people. Sometimes, the property in the account is meant to be held equally by all the owners of the account – the “true” joint account. But at other times, a parent will put assets into joint names with a child so as to allow the child to help the parent manage the assets – a “power of attorney” joint account. In this latter situation, the parent is giving the child an ability to deal with the assets in the account but solely for the benefit of the parent, with no thought of making the child an owner of those assets.

The problem is distinguishing between the two types of cases.

The distinction turns entirely on the intention of the parent who established the account. In most cases, nobody thinks to record that intention in clear written form. After the parent dies, the surviving joint account holder maintains that the funds in the account belong solely to that child. Siblings often take the opposite view – that the funds in the account belong to the parent’s estate. And so the family heads off to court to dissipate the estate on legal fees and to destroy whatever relationships might have existed among family members.

This year’s Supreme Court of Canada cases dealt at great length with legal rules of thumb (legal presumptions) that apply when the evidence of intention is not clear. Based on these court cases, the governing rule of thumb is to assume a gift only if a parent opens a joint account with a minor child. This means that the courts will assume that a joint account with an adult child is a “power of attorney” type of account rather than a “true” joint account – in other words, that the assets in the account form part of the parent’s estate on the death of the parent. But this rule of thumb can be rebutted by evidence, so court battles will continue to be fought on this issue.

Invariably, the evidence is circumstantial and can be interpreted to point in both directions. In this year’s two Supreme Court decisions, virtually identical facts were interpreted as favoring one conclusion in one case but as favoring the opposite conclusion in the other case.

So what to do?

The short answer is to retain clear written evidence of the parent’s intention if setting up a joint account with an adult child. It is best not to rely on documents prepared by the financial institution, as those documents primarily deal with the relationship between the account holders and the institution. The financial institution merely needs to know who can withdraw the funds – it does not usually care who owns the funds.

The big-picture answer, however, is to think clearly about whether establishing a joint account with an adult child makes sense in the context of your overall estate plan. Specifically, get good advice on the tax implications. Placing investment assets into a true joint account with anyone other than your spouse can lead to capital gains tax. As well, assets held in a true joint account pass automatically to the surviving joint owner – there is then no possibility of placing the assets into a testamentary trust for the benefit of the survivor (such a trust can have tax and other advantages). Also think about creditor implications: what if the child runs into financial difficulty and the child’s creditors attempt to seize half the funds in the account?

Confusion will continue to reign in respect of joint accounts even in spite of this year’s Supreme Court of Canada decisions. Indeed, certain passages in the Supreme Court judgement – if taken out of context -- will lead to confusion about the tax implications of setting up a joint account. But as the court itself pointed out, it was just deciding who owned the assets in the account – not the tax implications. Clarification of those comments will require another Supreme Court of Canada decision, most likely.

-- Blair P. Dwyer

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.