Why Adding Adult Children As Joint Owners Can Create More Problems Than It Solves

Recently, I learned that a grandmother had sold her home and put $1 million into a joint account with her three adult children. When one of her children unexpectedly predeceased her, that child’s own adult children were effectively cut out of their expected share of the inheritance from the joint account. Because the account was structured as a joint tenancy with rights of survivorship rather than as tenants in common, the deceased child’s legal interest passed automatically to the surviving joint owners instead of flowing through the estate . The adult grandchildren no longer speak to the aunt and uncle they were once extremely close to.

It is easy to understand how families end up in arrangements like this. A parent might want to avoid probate fees and the delay that can come with settling an estate. Or it might be about convenience, making day-to-day banking or administration easier as they get older. But what looks like a practical shortcut can carry unintended consequences that are easy to overlook.

In the case of the grandmother and her three children, the outcome ultimately depended on both the structure of the account and evidence of her intentions.

This is just one example of how joint ownership, often intended as a simple estate-planning shortcut , can create serious tax, legal, and family consequences if not structured properly.

The risks of joint ownership

First, and often most consequentially, is that once a child becomes a true joint owner, they may also have a say in future decisions involving the asset. If the parent later wants to sell, refinance or renew a mortgage, the child may need to be involved in that decision. What appears to offer convenience can lead to a loss of control, particularly if disagreements arise or family circumstances change over time.

Another often overlooked risk is how the child’s personal circumstances can affect the asset. If the child faces marital breakdown, creditor claims or legal proceedings, their ownership interest or even the perception of ownership can complicate matters and potentially expose the asset to claims or litigation.

The extent of that exposure will often depend on the true beneficial ownership arrangement and the applicable provincial family and creditor laws. In a divorce, jointly owned property can affect how net family property is valued and how assets are divided, depending on the applicable provincial rules and any prenuptial agreements in place. Because these rules vary by jurisdiction, families should seek professional advice on how joint ownership and family law apply to their situation.

Tax consequences can also follow . Some parents assume that adding a child to the title of their principal residence will have no tax impact. However, if the child has a true beneficial ownership interest and does not ordinarily inhabit the property, part of the future gain attributable to the child’s interest may not qualify for the principal residence exemption. In addition, while joint ownership may avoid probate in some cases, it does not necessarily avoid the deemed disposition and potential income tax consequences that can arise on death.

But the fallout is not always legal or financial. In many cases, the greatest damage is emotional.

Avoiding family conflict

In families with multiple children, naming one child as a joint owner can quickly become a source of resentment, especially if the reasoning was never clearly documented or explained.

This often happens when one child has taken on more of the caregiving responsibilities for a parent and the parent wants to recognize that contribution. While that intention may be understandable, if it is not clearly communicated, siblings, spouses and other relatives may see the arrangement as unfair.

Once families begin arguing over whether an asset was truly intended as a gift or should be part of the estate, legal costs can quickly dwarf the probate fees the parent was trying to avoid in the first place.

In fact, Canadian estate lawyers often point to joint accounts between parents and adult children as a common source of estate litigation. Courts have repeatedly been asked to determine whether a parent intended a joint account to be a true gift to the surviving child or whether the funds were meant to remain part of the estate. Following the Supreme Court of Canada’s decision in Pecore v. Pecore, transfers to independent adult children are generally presumed to be held in trust for the estate unless there is evidence showing the parent intended a gift.

• How can Louis get his inheritance if his brother refuses to move from the family home?
• What should Victor do if his uncle says there is a will but refuses to produce it?

Alternatives to joint ownership

Before adding a child as a joint owner, families should first ask what problem they are trying to solve. If the concern is day-to-day banking or planning for incapacity, a power of attorney over a bank account may be more effective. If the goal is to help manage an investment account, giving trading authority can provide the necessary access without changing ownership.

Simple steps such as updating wills and reviewing beneficiary designations are often overlooked as life gets busy and family circumstances change.

Saving on probate fees and simplifying estate administration through joint ownership may sound appealing, but those benefits are only part of the equation. Before making an adult child a joint owner, parents should understand the tax, legal and estate implications and consider whether a different approach would better achieve the intended result. The desire to simplify an estate today should not come at the cost of creating confusion, conflict or unintended tax consequences tomorrow.

Ida Khajadourian is a senior portfolio manager and senior investment adviser at Richardson Wealth.