The challenges of joint investment accounts

A joint investment account may seem like an ideal choice for family members to simplify financial matters. Some parents add adult children to their accounts to help manage their finances if they become seriously ill. Family members may also choose joint accounts with an intention to bypass the will and minimize probate fees when they die.

While these may seem like logical solutions, joint accounts can also lead to problems such as financial abuse and possible legal action if a disagreement develops over rights to and ownership of the assets.

“If you are going to set up a joint account with family members other than a spouse, you have to be careful when trying to use this as a probate planning tool,” says Jag Gandhi, vice-president, wealth planning at Gluskin Sheff. “It may not always provide the results you want.”

Apart from potential disputes over how a joint account is used and managed, Gandhi says account holders could be affected if the other person has financial issues. For instance, if one account holder gets divorced or goes bankrupt, the other party could be subject to any claims made on the account by the ex-spouse or creditors. It could also result in unintended tax consequences such as potential capital gains on transfer.

For families considering joint accounts, particularly parents and their adult children, Gandhi recommends talking to professional advisors first about what the goal for the joint account is and what both parties are trying to achieve with joint access.

“What’s the true intention and is a joint account the best solution?” Gandhi asks. “An advisor can help you work through those questions and find the right answers.”

People who set up a joint account could consider drawing up a “declaration of intention,” which is a legal document laying out why the new account holder is being added. The declaration can state that during the lifetime of the testator beneficial ownership of the account is not changing. Only legal title will change on the account and upon the death of the testator, the account is to be dealt with according to the testator’s will. However, this could cause a problem if only one will is executed, as opposed to multiple wills, and the estate of the testator needs to be probated.

Gandhi points to an often-cited 2007 Supreme Court of Canada ruling, Pecore v. Pecore, where a father set up a joint bank account with his adult daughter. The daughter claimed after her father’s death that the account assets were hers and not part of his will and estate. As a result of that decision, if a testator adds an adult child as a joint holder to an account or property, and that testator dies, the court presumes the survivor holds that account or property in a resulting trust for the estate unless evidence proves the testator’s intention to gift that joint asset to the surviving joint holder. On the facts of Pecore, the Supreme Court of Canada agreed with the findings of the trial judge that the father intended the daughter to take any balance remaining in the accounts upon his death.

It’s an example of why it’s important to have some documentation about the intentions for the joint account and perhaps a “Deed of Gift” of the right of survivorship would help illustrate the testator’s intention that after his or her death the joint account is to belong to the joint holder.

Tiffany Harding, vice-president and head of Wealth Planning at Gluskin Sheff, says families need to balance convenience and potential probate fee savings of joint accounts with the legal and financial risks.

“You may think it’s an easy thing to do, but it can be fraught with issues,” Harding says. “Many people don’t understand the potential ramifications. They only think about half of the story.”

Harding says a better option than a joint account could be to have a power of attorney (POA) for property to handle financial affairs when someone is incapacitated. She says most adults with assets should have a POA for property for financial affairs and also recommends a POA for personal care for health matters.

Also, have a well-drafted will to lay out your intentions for your estate when you die. There are tax-advantaged planning strategies available to help protect your assets upon death.

“Qualified tax, legal and estate advisors can help determine what options are best for you and your family,” Harding says. “Every situation is unique”.

* Please note there are references to employees who are no longer with the firm, but were as of the date of publication.