There may come a time when opening a joint bank account or investment account with a parent, or conversely a child, will make a lot of sense. There are a variety of reasons why one might consider going in this direction and we will address these throughout this article. It’s important that you understand both the benefits and the potential drawbacks of joint accounts with a parent or child.
Why Joint Accounts
There are many reasons one might decide to open a joint account. Some of these reasons include the following.
1. Primary Handler Of Finances Passes Away
If one parent handled the finances for both themselves and their spouse throughout the marriage and they pass away first, it’s very likely the remaining spouse would be lost when it came to managing their accounts.
In this situation, it might make sense to consider having a joint account with your child to aid in your finances.
2. Travelling/Unavailable Parent
As our parents move into their retirement years, they may decide to vacation more and travel the world. Not being in the country doesn’t excuse them from financial responsibilities and commitments in Canada and so it might make sense for you to have a joint bank account to handle their finances while they’re away.
3. Mental Deficiency
A lot of issues arise if and when your parents’ mental faculties begin to diminish. It can be devastating for the entire family. You have to start taking care of every aspect of their lives, such as finding them an assisted living facility or even taking them into your home.
Dealing with their finances is something else you might have to address and it would be that much easier if you had access to their accounts. Having a joint account would give you the authority to pay their bills and handle their money in the best way possible. It can also potentially avoid probate on the account once your parent passes away.
Generally, when someone passes away, their accounts are frozen and must go through probate in order for the executor to be authorized to transact on the account. We’ll cover this in more detail later.
4. Large Inheritance
You may be entitled to a large inheritance and your parents may want you to gain experience dealing with investments and manage accounts while they’re still alive to teach you what they know. A joint account, be it an investment account or a bank account, could serve as a great learning tool for when your parents are no longer around and that money becomes yours to manage.
Probate is the legal process to determine the trustee of a deceased person’s estate. This person is called the executor. Once the will is probated, the executor will be authorized to make decisions.
There are many reasons one might want to avoid probate, but the two biggest ones are time and cost. Probate can be a lengthy process, sometimes lasting more than one year. During this time, all the assets in question are frozen and the beneficiaries of the estate have no access to any of it.
Another motivation to avoid probate would be cost. To add insult to injury, after having the assets frozen for the duration of the process, once it’s over there is a cost to have assets unfrozen. The probate fees differ from province to province and are dependent on the size of the estate.
So the question becomes, how does one avoid probate? A living trust and gifting money from accounts are two ways, but what we’re focusing on is joint ownership. Technically the account may still be subject to probate, but practically, in a joint ownership arrangement, the account will not be frozen and the assets could be sold and transferred so that there is nothing left in the account to be probated.
The reasons you may want to have a joint account are numerous. However, there are risks associated of which you should be aware not limited to the following.
1. Capital Gains Tax
A capital gain is profit resulting from investments such as real estate, stocks or bonds and is the difference between the selling price and the purchase price of the investment. Capital gains taxes may be triggered if the assets are transferred to an account held with someone other than your spouse if it is deemed there is a disposition of the assets in the account.
You may lose control over the account and decisions may be made without your consent. The problem with that is the other party can withdraw all of the money, regardless of their contribution to the account.
Another consideration to be aware of is the possibility of a breakdown in the marriage of one of the account holders. If you share an account with a parent or child and one party gets divorced, the estranged spouse may claim that the account is an asset to be divided in the divorce.
Without accurate records it may be difficult to prove how much each person on a joint account contributed over the course of time. Therefore, the entire account may be considered an asset at risk in a divorce.
If one of the account holders becomes bankrupt, the joint account may form part of the bankruptcy.
5. Other Beneficiaries
If you have only been managing the account but not actually contributing to it, there should be no issue as to the ownership of the assets. However, if you have been making contributions to the account as well, problems could surface in the event of one party’s death.
If there are beneficiaries other than the surviving joint account holder, they might feel entitled to a portion of the accounts total value. While, in theory, only the deceased person’s proportional interest in the account should form part of their estate, if proper records are not maintained when both parties make contributions to the account, it may prove difficult to determine the appropriate proportional interest.
A further consideration which this article does not cover is joint property ownership. There are some similarities between this and having joint accounts in terms of the benefits and drawbacks. However, there are other factors you will want to keep in mind, such as deemed disposition of assets and principal resident considerations.
There are many good reasons to consider having a joint account with a parent or child. It can make the tail end of your parents’ life much easier as they are no longer worrying about dealing with their finances, but you should also be aware of the potential negatives of such an arrangement.
To better understand the risks and your options, speak to your advisor before making a decision.
If you have any questions with respect to Joint Accounts or any other income tax matters, please contact Joseph A. Truscott, Chartered Accountant at (905) 528-0234 or e-mail Joe at [email protected].