Many of our clients ask us questions about how to minimize taxes and fees on their estate such as:
Can we skip probate (and all the complications of wills and estates) by adding our child’s name to our account?
At first glance, this seems to offer a simple sidestep away from those extra fees.
However, like many simple solutions, there’s more to it than meets the eye.
To help you understand the complications associated with joint accounts, we’ll go over a few options, so you can determine the route that best suits you.
What is probate?
Probate is the legal process of certifying a will.
Essentially, the estate pays the probate court to determine the will is authentic and doesn’t conflict with later documents. This ensures there are no problems with multiple wills, and that the final will the deceased wrote (while legally capable) is followed.
How much do probate fees cost?
Because they are administered provincially, probate fees (also known as Estate Administration Tax) change depending on where you live in Canada.
In Manitoba*, probate fees are calculated based on the value of the estate.
- Up to $10,000 in value, an estate must pay $70 in probate fees
- For every extra $1000 in value, an estate must pay $7 in probate fees
So, if the value of the estate is $100,000, the calculation would look like:
- $70 for the first $10,000.
- The next $90,000 charged out at $7/$1000 or 90 x 7= $630
- Add the first $70 to the second $630, and you get: $700
You can download probate forms from the Government of Manitoba website, or purchase them at a Manitoba court centre.
*A bill has been read in the legislature to eliminate probate fees, but it has not yet been passed.
How do joint accounts work?
Joint accounts work the same as traditional bank accounts, the only difference being two (or more) people have access to it, and can make transactions.
One of the most common uses of a joint account is for married couples, which allows both parties to see how the money is being spent.
If the worst should happen – i.e., a spouse passes on, the surviving partner will still have uninterrupted access to the bank account, without needing to wait for probate. This allows them to continue paying bills, etc. without any trouble.
The problem with joint accounts
Despite what the account agreement says, the ownership of funds within a joint account is decided by the doctrine of resulting trusts. This states the depositor of the money within a joint account remains the owner of the funds.
So, if the depositor dies, the survivor holds the balance in trust of the estate of the depositor, unless it was intended as a gift. If the intention is unclear, however, the estate can sue for access to the account.
For married couples and children who are minors, the court assumes the money is intended as a gift. If the estate wishes to sue, the onus is on them to prove otherwise.
For adult children, the onus is reversed. So if the estate chooses to sue, the adult children are required to prove the balance in the joint account was intended as a gift.
Joint accounts for parents and children
Before even considering this road, it’s important to clarify that using joint accounts won’t work if there is more than one beneficiary.
If there are siblings, cousins, or other family members also marked as beneficiaries, this route becomes not only more difficult, but also relies on a lot of goodwill.
Because the aim of joint accounts is to bypass the estate as the money is passed down, the money won’t go through the will. That means the executor, who is charged with following the will, won’t touch it unless the estate sues the account holder.
The overall point being, this can cause more stress in an already painful time.
The risks of a joint account
If you are the sole beneficiary, you won’t have to deal with the above risks. Becoming a joint account holder allows you to avoid probate by keeping the account out of the estate. It also means you can pay your parent’s bills if they become unable to.
However, there are a variety of risks associated with this, including:
- If the joint account holder has any debts, gets divorced or faces a lawsuit, the account may become vulnerable.
- Adding a child’s name to an investment account could result in Capital Gains Tax.
- Real estate may no longer qualify for the tax-free principal residence exemption.
Ensuring your ageing parent’s bills are paid
Aside from avoiding probate, children of ageing parents often use joint accounts to take over bill payments if their parent is unable or unwilling to.
However, there are better ways of doing this that won’t open you up to the risks listed above.
Enduring power of attorney is a great alternative option for those looking to create financial stability for their ageing parents.
Talk with an expert
Whether you’re an ageing parent or the child of an ageing parent, it’s important to talk to a professional who has experience dealing with inheritance and estate planning to make sure things go smoothly as possible. Not only can this result in lower taxes, but it can also help make a difficult time a little bit easier.