The risks of co-owning property

Using a power of attorney to manage joint ownership

Sharing property ownership with another person certainly has its advantages, but joint tenancy also carries its fair share of risks. More often than not those risks can outweigh the benefits. Joint ownership may even cause you to lose out on financial planning opportunities that come with keeping your property yours alone. That’s why it pays to consider a smarter alternative: a power of attorney.

Joint tenancy has its appeal. First there’s the convenience. Married or partnered couples often keep joint bank accounts to handle daily finances like paying bills. When aging parents need help managing their financial affairs, it’s not unusual to place investments in joint tenancy with adult children.

Families concerned with wealth transfer turn to joint tenancy as a low-hassle method of reducing probate costs, particularly important in high-fee jurisdictions like British Columbia. When property is held jointly with right of survivorship, on the death of one owner title to the joint assets generally passes outside the deceased’s estate to the surviving joint owner, bypassing probate in the process.

The problem with joint tenancy

A lure of joint ownership is it’s easy. It can be set up quickly at little cost and with minimal paperwork. At times it can be a sensible decision, like when dealing with a simple estate or sharing property with your spouse.

Unfortunately, it could also cost you in the long run, especially when adult children are involved. Consider the following risks before you embrace joint tenancy as a planning tool.

1. Loss of control

Under joint tenancy each owner has an equal share and full rights to the joint property, which can be problematic. For example, there’s little to stop a joint account holder from taking funds to use for their own purpose.

At the other extreme, you could be forced to obtain consent of the joint owner before acting, such as when selling real estate. Once you share ownership of your property it’s not a decision you’ll be able to reverse unilaterally.

2. Exposure to creditor claims

Jointly-held assets are open to claims by the creditors of any joint owner should they run into difficulty, whether it’s financial trouble, divorce proceedings, or legal action. If you add your adult child as a joint holder of your investment accounts and they declare bankruptcy at some point, those now-joint investments could be jeopardized.

3. Unexpected tax consequences

Transferring assets into joint names has the potential to generate taxable capital gains. Under the tax rules, switching to joint ownership means you’re essentially gifting a half interest in the asset to the other party at fair market value. Any gains you have on that portion of the property become taxable. And though the spousal rollover provision defers the tax bill when sharing joint tenancy with your partner, attribution of future gains and income may still apply.

Updating title on a home could impact a principal residence exemption. If you transfer your dwelling into joint tenancy with an adult child two things can happen. First, you’ll be limited to claiming your exemption on only half the home’s value. Plus, if your child can’t use their principal residence exemption on their share of your home – perhaps because they’ve already applied the exemption elsewhere – their portion could become taxable when the property is sold.

4. Strained relationships

Most times a joint owner will also be a beneficiary to your estate. But because survivorship has priority, even when they’re not specifically named in your will they could still wind up with your assets – possibly contrary to your wishes. The outcome? The potential for strained relationships or even litigation, as your heirs fight to claim the property.

Feelings of unfair treatment might bubble up in a blended family situation where you’re balancing the needs of a new spouse and children from a prior relationship, or when you have several adult children but choose to share ownership with only one of them.

5. Lose use of testamentary trusts

When you die, assets you own in joint tenancy generally pass to the survivor and out of your name. When that happens the opportunity for your estate to pay less tax as a graduated rate estate (GRE) testamentary trust is lost. (A GRE is a testamentary trust arising from an individual’s death that is permitted to use graduated personal tax rates for up to 36 months, subject to conditions.)

Normally your beneficiaries would be able to split income they receive from your assets with the GRE for up to three years and reduce their tax bill. The potential tax savings from this arrangement can more than offset the costs of probate. Note that after the tax advantages of the GRE cease, as a testamentary trust it still offers value including creditor protection and property safekeeping for the benefit of beneficiaries.

Power of attorney – a wise choice

A well-designed power of attorney can help you avoid joint tenancy’s inherent difficulties.

A power of attorney (POA) allows someone you appoint – your ‘attorney’ – to manage your financial affairs when you cannot, whether due to temporary factors, or long-term issues like serious injury or mental incapacity.

Unlike joint tenancy, a POA doesn’t extend ownership of your property to another, only authority over it. That authority is at your discretion. You may amend or revoke the power of attorney as you wish, as long as you’re mentally capable.

The beauty of a POA is its flexibility. You can grant your attorney broad powers to handle your finances, or limit their scope to a particular activity or situation, such as paying bills or selling a house. Once in effect a POA can be active for years. Or, it can be time-limited, as when you ask your attorney to look after things while you’re travelling.

The authority of a general POA ends once you lose mental capacity. To guard against this an enduring power of attorney is necessary to allow your representative to continue managing your affairs. A POA can also be made springing or contingent if you want it triggered only after a specific event occurs such as a diagnosis of incapacity.

In situations where a parent wants help managing their property, but would rather not share title, a POA is often an ideal solution.

Tips for creating a power of attorney

A power of attorney is a robust legal tool that should be created with care. Observe these guidelines to help ensure you get the results you want.

Learn what your POA can and can’t do

Your POA’s range of activity isn’t limitless. For example, they can’t make, change or revoke a will, delegate authority to someone else unless specifically authorized, or have their interests conflict with yours.

Choose your POA wisely

Your nominee should be trustworthy, reliable, financially competent, and have the time to carry out their duties. You may appoint more than one POA. In some circumstances it may be best to name a legal professional, financial advisor, or a trust company to represent you.

Review your POA selection periodically

The person you nominate today might not be suitable as time passes or as circumstances change. Remember to adjust your POA as necessary to keep it aligned to your short-term and long-term goals.

Talk first

Despite its advantages a POA still has the potential to stir up family discord. When selecting someone for your POA, it’s a good idea to discuss the situation with your loved ones and hash out any concerns beforehand.

Work with a qualified professional

Beyond ensuring a POA complies with legal requirements, you want your document to help you achieve your objectives and protect your interests, not hamper you with unintended consequences. Get proper guidance first.

Understand your options

Opting for joint tenancy is a convenient choice, but not always your best option. The key is getting the right advice. At BlueShore Financial, we can help you decide when joint ownership may be a good fit and where a power of attorney would be a safer and smarter option. Speak with your advisor to learn more.