The risks of joint investment accounts with your adult child

Disclaimer: This article discusses Estate Planning.  It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

Many Canadians want to try and avoid probate fees as much as possible and this can guide their estate planning. One area where we see this is when it comes to joint investment accounts. 

However, like joint bank accounts, there are risks involved. What happens to these joint investments when you pass away? How are they treated within the estate?

In this article, we’ll review the legal presumptions surrounding joint ownership. Then we’ll discuss the potential risks to your estate. For personalized advice, we invite you to reach out to our team for a complimentary consultation.

Capital gains tax versus estate taxes and probate fees

The concerns over estate taxes and probate fees are often exaggerated. In reality, these costs are generally less significant than capital gains taxes. Probate fees, which cover the legal process of administering an estate, are typically a small percentage of the estate’s overall value and can be mitigated with effective planning. On the other hand, capital gains taxes can be significantly higher.

Let’s compare: Estate tax is 0.5% for the first $50,000 and 1.5% for anything over $50,000. Let’s compare that to capital gains tax. Your beneficiaries would be taxed on 50% of capital gains up to $250,000. Any gains exceeding $250,000 will be taxed at a higher rate of two-thirds, or about 66.67%.

When someone passes away, their investments are treated as if they’ve been sold at their current market value, which can lead to significant capital gains tax on any increase in value. This tax can often be much higher than probate or estate fees.

What does the law presume about joint investments with an elderly parent?

When a parent adds their child as a joint owner to an investment account, the law typically presumes that this arrangement is a resulting trust rather than a gift.

A resulting trust is a legal concept where the child, as a joint owner, is considered to hold the investment in trust for the benefit of the parent. This means that the child does not gain full ownership of the investment; instead, they are expected to manage it on behalf of the parent. Upon the parent’s death, the presumption is that the investments remain part of the parent’s estate unless there is clear evidence that the parent intended the investments as a gift.

What are the risks of joint ownership of investment accounts?

Joint ownership of investment accounts can pose significant risks, particularly when involving non-spouses such as adult children. Legally, joint accounts with non-spouses do not guarantee that the children will be recognized as beneficial owners. Without clear documentation, these assets might be included in the estate, which can lead to probate fees and legal disputes.

Control and security concerns are also notable with joint accounts. Co-owners can withdraw funds or change account terms without the consent of the other owners, which can diminish the original owner’s control. Furthermore, joint accounts are vulnerable to claims from creditors or complications arising from a co-owner’s divorce. If the court deems the investments as held in trust rather than as a gift, the adult child may lose access to these funds.

The assets would then be returned to the estate and distributed according to the parent’s will or probate laws, which could lead to unexpected financial challenges and disputes among family members.

How can you avoid these pitfalls?

To avoid complications, it is crucial to clearly document the parent’s intentions regarding the joint investments. If the investments are intended as a gift, you should create a gift acknowledgment. If not, have a lawyer draft a trust agreement. This agreement should explicitly state that the investments remain the parent’s property and are managed by the child on the parent’s behalf.

In either case, working with a lawyer to draft these documents is essential to ensure everything is clear. Proper documentation can save significant time, money, and emotional stress for all parties involved, helping to maintain family harmony during difficult times.

Build a strong estate plan with Beeksma Law

When navigating the complexities of joint ownership and estate planning, you need strong, strategic guidance. At Beeksma Law, we bring extensive experience and a deep understanding of the nuances involved. Our team not only excels in estate law but we also have strong connections with professionals in tax, finance, and other related fields.

By choosing Beeksma Law, you benefit from our proven track record to safeguard your financial and legal interests and help you leave behind the greatest gift of all – peace of mind.