Risks and Complications of Joint Tenancies in Estate Planning

Authors: John Agioritis and Lane Zabolotney

Joint tenancies are popular mechanisms used by testators to reduce the probate fees on their estates and simplify the overall estate administration process. They are attractive because of the “right of survivorship”, a unique operation of law which provides that when a joint tenant (i.e. co-owner) dies, any jointly-held property transfers to a surviving joint tenant directly rather than forming part of the deceased tenant’s estate. Since joint property passes outside of an estate, it is not subject to probate fees and can be distributed without a grant of probate.

However, joint tenancies also involve numerous risks and complications which may outweigh any probate fee savings. Testators should be aware of these complications, which include:

  • Tax consequences: When real property is transferred into joint names, there is a deemed disposition of the portion of the property that is transferred to the new tenant(s), unless the new tenant is a spouse. For example, if the sole owner of a property creates a joint tenancy with two additional tenants, there will be a deemed disposition of 2/3 of the property, meaning 2/3 of its fair market value will be taxed as a capital gain as of the date the joint tenancy was created. There will also be deemed dispositions on the deaths of each joint tenant.
  • Conflict among beneficiaries: Disgruntled beneficiaries who are excluded from a joint tenancy may dispute the joint tenancy’s validity. For example, a testator’s children may dispute a joint tenancy which benefits their parent’s new spouse, or which benefits one child to the exclusion of others. The Supreme Court of Canada’s 2007 decision of Pecore v Pecore has expanded the grounds on which a joint tenancy (or joint account) may be challenged by making the testator’s intention an important consideration.
  • Unequal distribution: If a Will provides that multiple beneficiaries are to receive equal shares of an estate and one beneficiary receives additional jointly-held property, the joint property will not be factored into the estate distribution. Accordingly, the beneficiary who received the joint property will also receive the same share of the estate as the other beneficiaries, which may not have been the testator’s intention. While a hotchpot clause can remedy this problem to an extent, it will not be able to fully equalize the distribution if the majority of the testator’s assets pass outside the estate.
  • Access to property: All joint tenants are entitled to immediate access and use of jointly-held property. This may cause problems if the original owner wishes to retain exclusive use of the property for the remainder of his or her life.
  • Difficulties selling: In order to sell a jointly-held property, all joint tenants must agree to the sale. If they cannot agree, it may be necessary to make a costly application for court-ordered severance.
  • Creditors: A jointly-held property may be subject to the claims of each tenant’s creditors, including family property creditors in divorce or separation proceedings.
  • Principal residence exemption: If the joint property is a principal residence for one of the tenants, the principal residence exemption will not be able to fully shelter the capital gain on a disposition of the property if the other joint tenants used the exemption on their own residences.

In addition to the above, there are many other complications which may arise from the use of joint tenancies. As with any aspect of estate planning, it is always wise to speak with your professional advisor before putting in place any joint tenancies or joint accounts.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.