The perils of joint accounts

Joint accounts are shared accounts from which both parties can withdraw funds. Normally, they are considered to be owned by both parties, with the survivor getting the money upon the death of the other.

However, if the only aim of the account is providing John with the ability to use his mother’s assets to pay her bills, then the assets in the account should be considered solely Joan’s and part of her estate when she dies. The challenge is to make sure that happens – that the money is used only to pay Joan’s bills, and that the remainder becomes part of her estate.

There are three ways to deal with this challenge. One is to have a document written and properly witnessed that specifies the purpose of John being named on the account.

A second option is for Joan to make John her power of attorney (POA) for property. In that case, the POA document should specify when it will come into effect. Once those conditions are met – and documented for the financial services institution at which the account is held – John can use Joan’s funds to pay her bills without being considered a joint owner of Joan’s account.

A third option is for Joan to set up an “alter ego” trust. This is an inter vivos trust that can be created by a Canadian resident who is 65 or older. With such a trust, only the person establishing it is able to receive income from the trust while he or she is alive, but the trustee (or trustees) can use the money in the trust to pay the owner’s bills.

Although all three approaches can work, the use of joint accounts often is discouraged by financial advisors.

“[Joint accounts] are rarely a good idea between generations,” says Keith Masterman, vice president of tax, retirement and estate planning with CI Investments Inc. in Toronto.

Christine Van Cauwenberghe, assistant vice president of tax and estate planning with Investors Group Inc. in Winnipeg, agrees: “We never recommend [joint accounts] when children are involved. [Such accounts] can open up a huge can of worms.”

Both Van Cauwenberghe and Masterman prefer POAs, although Masterman notes that in cases in which substantial assets are involved, alter ego trusts can be an alternative option.

Here’s a look at the three approaches in more detail:

– Joint accounts

Van Cauwenberghe points out that joint accounts have been the source of much litigation. If there’s any grey area about the intent behind the creation of the account, either the joint accountholders or other family members may take the issue to court. Litigation is very expensive and should be avoided if possible.

With a joint account, there’s a loss of control of the assets, says Masterman. If the child named on the account gets into financial trouble, there’s nothing stopping him or her from accessing the account – and perhaps never paying the money back.

If two children are put on a parent’s account and one child predeceases the parent, all the assets in that account could go to the other child, with the spouse and children of the predeceased child getting none of them, despite a contrary intention of the parent as expressed in his or her will. This situation is a major problem if all the parent’s assets are in joint accounts.

If a child who is named on a joint account gets divorced or goes bankrupt, a claim could be made on the joint account by the ex-spouse or creditors.

If only one or two children are named on a joint account, the other siblings could feel slighted. This could lead to serious damage to family relationships.

There have been numerous court cases involving joint accounts. The Supreme Court of Canada’s rulings on two – Pecore v. Pecore and Madsen estate v. Saylor – in 2007 often are cited as precedents. Both cases involved a father establishing a joint bank account with an adult daughter who claimed the assets in the account to be hers when the estate was settled and, thus, not part of the father’s estate and not subject to the terms of the father’s will. In both cases, other beneficiaries named in the wills challenged that claim.

The key in both cases was whether the daughter could show that the proceeds of the account were intended as a gift to her. In Pecore, the daughter was able to do so and kept the assets. In Madsen, the daughter couldn’t prove the assets were intended for her, and she had to return the account’s proceeds to the estate.

– Property poas

POAs don’t have the problems inherent in joint accounts – except the possibility of damage to family relationships if children not chosen for the POA feel slighted. To avoid that problem, the client’s whole family should be told what’s being done and dealing with any issues up front is a good idea. That discussion also should take place if joint accounts are chosen.

Although there are not a lot of potential problems with POAs, the document must be worded very carefully. Some property POAs are effective immediately when written and signed; others may have a clause saying they take effect “when I choose” or “if I am unable to manage my affairs.”

This last situation can pose difficulties. If a person is unable to manage his or her affairs, there must be evidence – usually as a result of an assessment by a doctor.

The whole family should be involved, and that can result in some difficult conversations, with family members disagreeing about whether the parent is incapable.

However, once the POA is in effect, matters are relatively simple. The POA creates a fiduciary relationship, with the POA-holder having a legal obligation to administer the primary accountholder’s finances in his or her best interests. That obligation includes making sure that any provisions in the person’s will are taken into account. For example, if an asset – say, a work of art – is being left to a certain person, that item should not be sold to meet expenses if that can be avoided.

The holder of the POA must know the contents of the will. So, if that person is a family member, consideration should be given to letting the other members of the family also know what’s in the will.

If POA is held by one or two of several children, the holders of the POA need to be seen by their siblings as an appropriate choice.

Choosing the right person to hold a POA also is important. He or she must understand what a fiduciary relationship is, what the POA’s obligations are, how to administer the assets in the best interests of the owner of the assets, and how to handle financial matters in general.

– Alter ego trusts

The Canada Revenue Agency describes an alter ego trust as “an inter vivos trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor is entitled to receive all the income that may arise during his or her lifetime, and is the only person who can receive, or get the use of, any income or capital of the trust during the settlor’s lifetime. A trust will not be considered an alter ego trust if it so elects in its return for its first tax year.”

One or more trustees are named, and they administer the trust’s assets during the life of the owner.

The distribution of an alter ego trust’s assets after death of the owner is detailed in the trust document and is private – unlike wills, which become public documents after probate. In addition, the distribution of assets from a trust are not subject to probate fees – again, unlike for a will.

When assets are transferred to an alter ego trust, there is no “deemed disposition,” so capital gains taxes are deferred until the assets are sold or the person who created the trust dies.

A potential disadvantage is that trusts don’t qualify for the lifetime capital gains exemption for shares in qualified small businesses (currently, $813,600). So, using up that exemption before putting assets in such a trust is a good idea.

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