It's not uncommon for an elderly parent to transfer real
estate or other assets into joint names with his or her adult children.
When this happens, does the law presume that the transfer is a gift, or
does the child merely hold the asset in trust for the parent?
Those
were the questions which arose in the case of Pecore v. Pecore, which
was decided by the Supreme Court of Canada last year.
In 1993,
Edwin Hughes was advised that his $1 million estate could save
significant probate fees on his death if he transferred ownership into
the joint names of himself and his daughter Paula Pecore.
After
most of the estate was transferred, Hughes was told that this type of
transfer could trigger a significant capital gain on the profit on
Paula's "half" of the assets.
Since that was not his intention,
he wrote letters to the financial institutions holding the assets
stating that the ownership change was for probate purposes only (to
avoid the 1.5 per cent probate fees), and was not to be interpreted as
a gift to Paula during his lifetime.
Shortly before he died,
Hughes signed a will dividing his estate equally between Paula and her
husband Michael Pecore. When Hughes died, Paula redeemed all of the
investments, which she was entitled to do because they were registered
jointly with her father.
Two years later, in the midst of
divorce proceedings, Michael discovered he was entitled to half of his
father-in-law's estate and sued Paula for his share.
Two
long-standing common law doctrines come into conflict in situations
like this where a parent transfers assets to an adult child.
The
first is known as a "presumption of advancement," where the court rules
that the recipient receives the asset as an outright gift.
The
second is referred to as a "resulting trust," which is when the court
will presume that the recipient does not receive anything, but merely
holds the asset in trust for the giver.
In the Pecore case, the
trial court ruled that the father had made an outright gift of all his
assets to his daughter, and the "presumption of advancement" (or gift)
rule applied – with the result that Paula's husband got nothing.
The Ontario Court of Appeal agreed with the result at trial, but for different reasons.
Michael
Pecore's appeal to the Supreme Court of Canada was heard by all nine
judges in December 2006, and its decision was released in May of 2007.
The
Supreme Court held that the trial judge got the right result for the
wrong reason. It decided that the presumption of gift (or advancement)
no longer applies to transfers of assets to independent adult children.
Instead, the courts will now presume that the adult child is
holding the property in trust for the aging parent to facilitate the
free and efficient management of that parent's affairs. In cases like
these, it is always open to the recipient child to produce evidence to
counter the presumption that the assets are to be held in trust.
In
the Pecore case, the Supreme Court decided the evidence clearly
demonstrated the intention on the part of the father that the transfers
were gifts to go to Paula alone when he died – despite the 50-50
division in the will.
Under the Pecore ruling, which now binds
every court in the country, assets – including real estate –
transferred to independent adult children are presumed to be held in
trust by the child for the parent unless the child can prove that the
parent intended a gift.
If the recipient child is under 18, however, transfers to him or her are presumed to be gifts.
The
Pecore case holds an important lesson for parents elderly or not, who
transfer assets or joint ownership of assets to their children.
The
Supreme Court has now ruled that in cases like these, where the
transfer could be subject to challenge at a later stage, the parent's
intention should be clearly documented to indicate whether or not it
was a gift.
In the absence of evidence to the contrary, courts will presume that transfers to independent adult children are not gifts.
Ownership remains with the parent and the assets are therefore subject to probate and distribution under a will.
Bob Aaron is a sole practitioner at the law firm of Aaron &
Aaron in Toronto. Bob specializes in the areas of real estate,
corporate and commercial law, estates and wills and landlord/tenant
law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly. E-mail bob@aaron.ca
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April 28, 2008
Legal |