Before placing title to your home, bank account or investments into joint ownership with another person, it's important to understand the financial and legal risks involved. These transactions are regularly the subject matter of costly litigation, particularly when the recipient does not contribute financially in exchange for receiving the interest – a 'gratuitous transfer'. When these disputes reach court, a key question for the judge is the transferor's reason for making the gratuitous transfer.
Why might you want to gratuitously transfer ownership of an asset into joint tenancy?
1. As a Gift
On your death, ownership can go directly (by right-of-survivorship) to the surviving joint-tenant – for example your spouse or child – without passing through your estate. This means probate fees are avoided, as well as the inconvenience and delay of estate administration.
The gift has two varieties1: a"True Joint Tenancy", where you confer upon the recipient immediate ownership rights that are equal to yours and the "Gift of the Right of Survivorship" where you maintain exclusive control of the asset during your lifetime2. In either case, what remains (if anything) of the asset upon your death becomes the sole property of the recipient, by right of survivorship.3
2. For Convenience
The gratuitous recipient is placed on title to assist you with managing the asset, but has no true, or beneficial, ownership rights. If you die first, the recipient becomes the sole ownerin name(by right-of-survivorship), but he or she is obligated, as a trustee, to return the asset to the beneficial owner – your estate.
Somewhat bewilderingly, the legal documents giving effect to these transfers (e.g. real estate conveyancing documents, bank account opening paperwork) usually fail to specify whether beneficial ownership rights are being conferred. In other words, there's no way of telling from the official documents what the transferor's reason was for creating the joint tenancy – gift, or convenience4. This ambiguity about ownership creates a foothold for future litigation. Often the dispute arises years or decades later, when the transferor dies and his or her heirs proceed to challenge the ownership of the surviving joint tenant (to whom title has passed by right of survivorship), on the basis that the deceased never intended a gift, such that the asset really belongs to the deceased's estate. I call this scenario the 'fight of survivorship'.
There is need for reform in both commercial practices and the law, but until then, what can you do to minimize the risk of future problems when making a gift using joint ownership? Simply put, never make such a transfer for the second reason mentioned above (i.e. for convenience), as that is precisely what powers of attorney are for. The attorney for property has an obligation to manage your asset (or finances generally, depending on the scope of the power of attorney) in your best interests, but granting a power of attorney carries no possible suggestion that ownership rights have been affected.
A gift is the only good reason for making a gratuitous transfer into joint tenancy. Your gift intent should be clearly documented at the time you establish the joint tenancy. In your will (or a codicil thereto) you should specifically state that you want your jointly-held interest to pass by right of survivorship, and not to form part of your estate. Or you could instead write a letter expressing your desire to make a gift, and have the letter held in safekeeping by your lawyer, or by the transferee, who could produce the letter should his or her ownership ever be disputed5. Whatever method you use to document your intent, always be clear whether you intend a "Gift of the Right of Survivorship" or a "True Joint Tenancy".
Though a gift is the only good reason for making a gratuitous transfer into joint tenancy, this doesn't mean that joint tenancy is necessarily the right way to make a gift. On a $1,000,000 asset passing by right-of-survivorship, your estate would save roughly $15,000 in probate fees, compared to the same gift made by will. But a gift in a will can be undone or changed at any time prior to your death (if you still have the necessary mental capacity), whereas a gift made using joint ownership is irrevocable6. And with joint ownership, there are financial risks, like your jointly held interest being exposed to the claims of creditors of the recipient joint tenant, or abuse by the recipient who could potentially drain all the funds in a joint bank account or encumber a joint property without your consent7. Finally, as explained above, litigation tends to loom over gratuitous transfers into joint tenancy – but with the information and tips contained in this blog post this risk can be greatly reduced.
Footnotes
1. Kennedy v Smith, 2022 BCSC 1622 outlines the types of joint tenancies that can result from a gratuitous transfer.
2. In Pecore v Pecore 2007 SCC 17, the Supreme Court established that the Gift of the Right of Survivorship, although appearing testamentary in nature, is really an immediate inter-vivos gift to the gratuitous transferee consisting of what remains, if anything, of the subject matter of the gift upon the gratuitous transferor's death, if the gratuitous transferee survives the transferor (at para 48).
3. If the recipient should predecease you, his or her ownership interest is extinguished, and you once again become the sole owner.
4. However, RBC Dominion Securities offers both a True Joint Tenancy investment account, and a Gift of the Right Survivorship investment account (using their own nomenclature). Providing a choice of joint accounts, with clear descriptions of the rights of the parties during their lives and upon the death of the first joint tenant, makes great sense and reduces the risk of future litigation.
5. See Feldman J.A.'s helpful description of the options for documenting a gift intention at para 83 of Saylor v Madsen Estate 2005 CarswellOnt 5896
6. See Pecore, supra note 2 at para 56. Although these gifts are irrevocable, they can be effectively 'defeated' if the transferor depletes the asset prior to his or her death (for example by draining a bank account to a $0 balance).
7. In a True Joint Tenancy there might be nothing improper about this, since both joint-tenants have equal rights to the asset (and each joint-tenant is considered to own 100% of the whole). With a Gift of the Right of Survivorship, though the recipient is not meant to be able to exercise control during the transferor's lifetime, there is still a risk this could happen since the recipient is on title.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.