With the value of the average Toronto home running north of $1 million, it can be tempting for parents to add their children to title to avoid paying the government’s 1.5 per cent probate tax on the death of the surviving parent.
On a $1 million Toronto house that tax comes to $15,000, and on the average condo at $640,000, the tax is $9,600.
Speaking at a Law Society seminar earlier this month, veteran Toronto real estate lawyer Tannis Waugh said that adding children to title to save probate expenses is generally “a very bad idea.”
“These kinds of title transfers are a problem,” she said, “and they generally don’t provide enough of a benefit to mitigate the risks and costs.” She warned that the tax savings are not significant compared to the risks.
Typically, title transfer to children is done by adding them as joint owners — with title transferring automatically by right of survivorship on the parent’s death.
But, Waugh noted, either party can at any time split the joint ownership so that the children would become absolute owners of 50 per cent.
If the property is not a principal residence, the title transfer could trigger a capital gain which will vastly exceed any probate tax payable.
Waugh provided a list of risks which are incurred when a property is registered in joint names:
Control: The parent will not be able to make decisions about the house without the child’s consent.
Mortgaging: The child can pledge his or her share of the property without the parent’s consent.
Marital interest: In the event the child’s marriage dissolves, the separated spouse could claim an interest in the house.
Bankruptcy: If the child becomes bankrupt or is sued by creditors, his or her interest can be seized to satisfy creditors.
Division and sale: The child has the right to ask the court to sell the property and divide the proceeds.
Multiple children: If only one of several children is going on title, the nonowner children could sue for “their share” of the house.
Land transfer tax rebate: Once a child is added to title of a parent’s house, he or she will lose their entitlement to a first-time homebuyer rebate.
To this list I would add that if the parent needs the equity in the house to fund nursing care at home or expensive residency in a retirement home, the child would have to consent — and that is not always a given.
Waugh added that the risks can be mitigated by the parent signing a trust agreement indicating that the child is holding title to the property in trust for the parent and they are registered on title solely for the benefits of survivorship.
This will not save probate tax but it will enable the sale of the house without waiting six months or more for the court to issue a probate order.
With or without a trust agreement, adding a child to title could result in expensive litigation or income taxes which would cost far more than the savings in probate fees.
Bob Aaron is a Toronto real estate lawyer. He can be reached at bob@aaron.ca . Visit his website at aaron.ca.