Estate planners often recommend that seniors create joint accounts in order to avoid the probate process. However, there are benefits and risks associated with joint accounts such as the unintended consequences that cause family rifts.
A joint bank account gives two people equal legal title to the whole balance in that account. There are several benefits to having joint accounts. Spouses can share control over managing assets, for example. An adult child caring for an elderly parent can help them with their banking. Money can pass to the joint account holder upon death without the funds having to go through the probate process. A bank account goes directly to the surviving account holder through the “right of survivorship,” and that person is the sole owner of the whole account. This side steps the need for that account to be included in the probate process and subject to probate tax.
However, there are risks with joint accounts too. Married or common-law partners might consider having a joint account that they both pay into for covering household expenses and bills. Most financial planners will advise couples to retain their personal bank accounts as well if they choose to set up a joint account. By putting two people’s names on the account, either one could empty the account at any time. So, this is one of the risks. When relationships go sideways, this is not an uncommon occurrence.
There are risks for families where a parent dies, and the parents shared a joint account, or a parent shared an account with an adult child.
In 2007, the Supreme Court of Canada decision in Pecore v. Pecore brought clarity to what occurs when one of joint account holders passes away. The court no longer makes a presumption about a deceased’s wishes.
Parents and Minor Children
For a joint account held between a parent or parents and minor children, the court will presume, without evidence to the contrary, that the parent(s) intended the funds in the account to be gifted to their children and that they would inherit the funds through survivorship.
Parents and Adult Children
Many people assume that joint accounts held between parents and adult children are treated the same as those held between parents and minors. The 2007 Supreme Court decision confirmed that this is not so. Instead, the courts will apply the presumption of resulting trust to joint accounts between parents and adult children (including dependent adult children).
This means the adult child is viewed to hold the account in trust for their parent’s estate. Unless the adult child can provide evidence that proves that their parent intended for them to inherit through survivorship, the funds will revert back to the estate to be shared among the deceased’s heirs and will be subjected to tax. The question that courts will always ask in these cases is: What was the deceased’s intention at the time of making the joint account? Was that documented?
Courts will look at several factors to determine whether the deceased intended for their adult child to inherit the funds left in the account. For example, they would look at who used the bank account, who paid income tax on the account, and of course, the bank documents from when the account was established. Simply checking off “joint tenants” on a bank account application is not adequate evidence by itself to rebut the presumption. Courts might look at the relationships between the joint account holders, the dependency of the child on the parent, and statements made to banks or lawyers regarding the ownership of the account.
Document Your Intentions
Parents who want their children to inherit their joint account through survivorship should consider expressing this intention in their will. However, if they would simply like some help managing their banking and finances, they could consider appointing their child as having power of attorney(“POA”) instead. This can give the adult child access to the account on their parent’s behalf and nothing more. However, parents wanting their children to inherit the joint account could designate them as having POA in addition to having a joint account. This reinforces the idea that the parent wanted them to inherit the account, because they did not need to add them to the account to get help with banking since they already had POA.
If you are considering setting up a joint account with a spouse, common-law partner, parent, or a child, obtain professional advice regarding your financial and estate planning. Make sure you understand the specific risks and how best to mitigate those risks by documenting clearly what your intentions are with the account, (and what your parent’s are) and what your wishes are for the joint account holder should you pass away. This will reduce potential future litigation costs as well as the personal and emotional costs for your loved ones in the future.