When planning for the future, it is common for families to receive well-intentioned advice that parents should transfer their farm land into joint names with their children before they die so that their estates can avoid probate fees.
Probate fees are the fees that an estate pays to the court in order to receive Letters Probate of a deceased person’s Last Will and Testament. Letters Probate are required whenever someone dies owning a land title in his or her sole name. In Saskatchewan, probate fees are calculated at 0.7% of the value of the assets of the estate of a deceased person. Assets held jointly with a surviving joint title owner fall outside of the assets of the estate and are therefore not subject to probate fees.
While it is true that probate fees can be avoided by putting farm land into joint names, there are some risks associated with this type of planning.
Loss of Control ~ One of the major consequences of adding a child as a joint title owner is that some loss of control occurs. Since the child is listed on title to the land as a joint tenant, if the parent wants to sell or mortgage the land, the child on title needs to sign off on that.
Breakdown of Child-Parent Relationship ~ Typically, at the time the child is added as a joint title holder, the relationship between the parents and the child is good. However, a rather common situation is one where a parent transfers land into joint names with a child, but then the relationship between the parent and child deteriorates or breaks down entirely. If the parent then wishes to modify his or her estate plan and asks the child to remove his or her name from title to the property, the child sometimes refuses. A court application is then required to compel the child to transfer the title back to the parent. Commencing formal legal proceedings is not only costly and time consuming, but it is also not always successful.
Family Property and Creditor Claims ~ Since the child’s name is on title, the land can be viewed as an asset of that child, even if the transfer was undertaken for the parents’ estate planning purposes. In the event that the child gets divorced or separates from their spouse, the joint interest in the land may be treated as an asset that is subject to a division of family property claim. Similarly, creditors of the child might also be in a position to lay claim against the land. In either of these circumstances, the parents are often pulled into such disputes.
Child Predeceases Parents ~ This is a commonly overlooked issue, since the “natural order of things” is that parents do not outlive their children. In reality, this is not always the case.
To demonstrate the issue, consider the following simple estate plans and what would occur if one child predeceased their parents.
Bob and Linda have 3 children: James, Chris, and Katherine. Bob and Linda own farm land and their Wills direct that upon the last of Bob and Linda to die, all of the property in their estates is to be divided equally among their 3 children. If any child predeceases Bob and Linda, their Wills provide that the deceased child’s share of the estate will be divided equally among that child’s surviving children (in other words, Bob and Linda’s grandchildren by that deceased child).
Scenario 1: Bob and Linda intend for James to receive 100% of the farm land when they pass away (rather than the 1/3 contemplated in their Wills). They add him as a joint tenant on title expecting James to receive the land by right of survivorship after they have died. However, James unexpectedly passes before Bob and Linda. What happens then?
James’ name would be removed from title to the farm land, leaving it in Bob and Linda’s names. Upon the last of Bob and Linda to die, the farm land would fall into their estate. This means that the farm land would be divided according to the terms of Bob and Linda’s Wills. The result is that James’ children would only receive 1/3 of the land notwithstanding that Bob and Linda intended for James’ inheritance to include 100% of the farm land.
Scenario 2: Bob and Linda put all 3 of their children on title to the farm land as joint tenants. James predeceases Mom and Dad. What happens then?
As above, when James passes away, his name would be removed from title, leaving Bob, Linda, Chris and Katherine on title as joint tenants. Once Bob and Linda pass away, Chris and Katherine would receive the land by right of survivorship and James’ children would not receive any portion of the land. The directions in Bob and Linda’s Wills would not apply to the distribution of the farm land because, as long as it is registered in joint tenancy, it falls outside of the property to be administered by the Will.
Conclusion ~ Sometimes putting property into joint names with a child works out very well. Probate fees are avoided and the land is retained by the intended beneficiary. However, sometimes the best laid plans do not materialize. The important thing to remember is that putting children on title as joint tenants requires careful consideration of the risks involved versus the benefit of avoiding probate fees.
If parents choose to go ahead with transferring titles into joint tenancy, it is important that additional documentation is completed at the time such transfer takes place that clearly records the parents’ intentions with respect to the property. This type of documentation can take the form of an Agency Agreement or some other document. Such an agreement:
(a) can stipulate that the parents retain complete control of the property during their lifetimes. Note, however, that even where such an agreement is in place, there are situations where children have refused to honour the parents’ decisions, effectively blocking the parents’ ability to deal efficiently with the land and sometimes leading to formal legal proceedings to resolve the matter; and
(b) can set out where the property is to go upon the parents’ death – either directly to the child who is on title by right of survivorship or to the child on title who is subject to the obligation to hold the land for the estate of the deceased parents.
Bottom line – putting a child on title to land involves more than just a simple change to title. Seeking legal advice for your particular situation before undertaking such actions is highly recommended, and documenting such transactions properly is critical.
One Last Note ~ Probate fees, income tax and GST are all different things. Avoiding probate fees by putting land in joint tenancy does not necessarily mean that your estate avoids taxes. Also, putting land into joint names can, in itself, trigger tax. All the more reason to get professional advice before completing any change of title.
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
The information in this guide is not legal advice. We encourage you
to consult with your legal advisor for specific advice.
This article was originally published in The Western Producer.