The danger of avoiding probate through the use of joint accounts

Avoiding probate is a topic that regularly comes up in conversations here in my office. Unfortunately, all too often the tail (probate fees) is wagging the dog (estate planning). Proper estate planning takes the cost of probate into consideration and, where it makes sense, proper estate planning will take steps to avoid those costs, but cost savings shouldn’t be the main consideration.  The most important thing is how you want your estate distributed.

Probate is the act of establishing the validity of a will.  This is done by the courts and it comes at a cost. Probate fees on estates greater than $50,000 in BC are $350 plus 1.4 percent of the amount of the estate over $50,000.  That can add up, so it’s understandable that we might want to take steps to avoid them.

Probate only applies to the estate. One can avoid some or all of the probate costs by naming beneficiaries or holding assets in joint name accounts, so that at death those assets go directly to the beneficiary and/or joint account holder and therefore bypass the estate and associated probate fees.

Periodically, I get asked by a senior (or sometimes their child) if someone should put all of their assets into a joint account with their child in order to simplify an estate and to avoid probate; to do so out of convenience.   And while every situation is unique and needs to be reviewed on its own merits, my advice is usually the same: while there can be some value in having accounts in joint name with an heir out of convenience, in most cases the risks are too great, and it should be avoided. This is especially true if there is more than one heir.

A quick side-note regarding joint ownership. In this article, I am mainly dealing with situations where the joint owner is only one of convenience. Of course, in situations where ownership is truly joint, such as an account held with one’s spouse, joint ownership is usually the way to go.

Where there is only one heir and there is a great deal of trust (such as a parent with only one adult child), maybe it might make sense. Even then though, the parent is putting themselves at greater risk and so needs to give it a great deal of thought before taking that step. In fact, I’d suggest talking to at least a few advisers such as a financial adviser, a lawyer and an accountant to see it from a number of vantages.

Let’s just take a look at the Partridge family. After talking to their manager (Reuben), Shirley decides it’s a good idea to put the house in joint name with her oldest son (Keith) just so that they can avoid probate.  She tells Keith that it’s for convenience only and that the proceeds of the house are to be distributed equally among all five children. The rest of Shirley’s assets (RRSPs, TFSAs) and some life insurance all list Reuben as the beneficiary in trust for each of the five children equally.

It’s important to understand that assets in joint name…

Are considered 100 percent owned by each holder, so Keith could sell the house or arrange a mortgage without Shirley’s consent or knowledge even before her death.

Are deemed “family property”, so if Keith got married and then divorced, half the house could go to Keith’s ex-spouse.

Are subject to each owner’s creditors and so could be seized by a creditor of Keith’s, and may trigger tax consequences.

Risk implications aside, Keith (not Reuben) will have the control over what happens to the house. Even if he does what he believes to be “the right thing”, if any of the other kids don’t agree, it could easily lead to major contention even to the point of law suits. In a case such as this one where the decedent’s wishes are not 100 percent clear and in writing, court cases can be exceedingly expensive and, more importantly, divisive to the point of no recovery, in terms of familial relationships.

I’m all for keeping estate costs to a minimum, but before going down the route of joint ownership (other than with a true joint owner such as a spouse), carefully consider all of the implications and risks.  As mentioned earlier…

If you only have one heir, and, if you trust them 1,000%, and if that heir fully understands the responsibilities and the potential effects of their own actions on your estate, and if after careful consideration and discussion with several advisers playing devil’s advocate, and if after all of that you still think you want to go down the route of joint ownership, then maybe it makes sense for you.

Probate fees can add up, but so can legal fees in the event that things don’t go as smoothly as you hoped. Be very wary of putting your assets in joint name just for the sake of saving a bit on probate fees.    

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.