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Probate or Capital Gains: a peril of joint ownership

Helpful Tips, Insurance

Posted by Peter Wouters

May 8, 2018 9:49:36 AM

Directeur, Planification fiscale et successorale et planification de la retraite, Gestion de patrimoine
Placements Empire Vie

 

People can go to great lengths to avoid probate costs, sometimes making them turn a blind eye to much bigger costs that can be created by passing assets outside of the estate. Let's take a look at a recent case concerning an elderly gentleman and his son. 

Meet Joe: Recently widowed and father of Nick. Meet Nick: Single, homeowner and only heir of his father's estate

Joe wanted to place his home into joint ownership with rights of survivorship, naming Nick as the joint owner. That way, estate settlement would be easier and probate/ estate administration taxes would be avoided. What about capital gains considerations?

Nick already owns a home so he would need to declare one of the two homes as his principal residence when he sells one of the properties. Gains on the other home would trigger some capital gains taxes when it is eventually sold. Which home would Nick choose?

Nick thought his Dad’s home would be the secondary home and would trigger capital gains on sale. After all, Nick felt he would only own half of it on the transfer now and would trigger a capital gain only on that portion when he eventually sold that house. No big deal, right?

Let’s look at this more closely.

Joe and Nick are trading a probate tax of about 1.5% of the value of Joe’s home in exchange for a capital gain on 50% of the increased value of that home. If Nick waited a while to sell the home after Joe, his dad, passed away, the capital gain would apply to the increased value on Joe’s 50% as well. In many housing markets, home prices are increasing, some dramatically. The capital gains then could be a lot more than the probate fees avoided.

But Nick and Joe should also consider these scenarios:

Probate

Joe would find it difficult to unwind a joint ownership transaction. Joe may wish to leave a large amount of money to a favourite cause. He may meet someone, fall in love and get involved in a common law relationship or even get married. Joe may wish to leave the house or a life interest in the house to the new love in his life.

Joint Ownership

Even if Joe remains single, his son, Nick, could become involved with someone for an extended period of time, including cohabitation or marriage using Dad’s home as the residence. Joe’s former home could be caught in any division of property or dependency claim dispute. If Nick were to run into financial difficulties or be sued for damages, then Joe’s home could get caught in the settlement.

Keeping these scenarios in mind, you need to consider the pros and cons of joint ownership. You can also talk to an advisor to learn about joint ownership complications and how life insurance can help cover estate costs.

 

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