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The question I have is regarding a joint margin account with a brokerage. What happens on the death of one spouse? Does the surviving spouse keep it in his or her name or can they add a son or daughter’s name on that account?
—Chander
Joint accounts after death
I come across this question so often, Chander, that it’s a good one to address in detail. There are different tax and estate implications with joint accounts depending upon who the account holders are. We will start with what happens when someone dies and their spouse is joint on the account.
Joint account taxation when a spouse dies
When someone dies, there is generally a deemed disposition, as if they sold all their assets at their current fair market value. However, when a spouse or common-law partner dies, capital assets can pass to the survivor on a tax-deferred basis. This could include, for example, real estate, private company shares and, with respect to your question, Chander, a joint non-registered margin account.
This means that the deferred capital gains are not automatically triggered, so there’s not necessarily tax to pay. The default is that assets transfer to the surviving spouse at their adjusted cost base (ACB), as if the spouse purchased the investments themselves. Interestingly, this would apply even if the account were not held jointly.
That said, you can elect to have the transfer take place at any price between the assets’ ACB and their fair market value. So, if your spouse has a low income or large tax credits in their year of death, or if they have unused capital losses that can offset the capital gains, it may make sense to trigger a capital gain on their final tax return.
A joint non-registered margin account generally passes to a surviving spouse without the need to obtain probate. So, that process requires only a copy of the death certificate and will result in no additional estate administration taxes, Chander.
Beneficiary designations for accounts
Canadians can name beneficiaries for their registered accounts, including registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax-free savings accounts (TFSAs).
In Quebec, you can generally only name a beneficiary in your will, so you cannot appoint beneficiaries for an account directly with a financial institution.
A non-registered account like a margin account cannot have a beneficiary, unless it’s a trust account, which typically requires a trust deed prepared by a lawyer and has annual legal and tax filing obligations. The cost and complexity of a formal trust are deterrents unless you have hundreds of thousands or millions of dollars to hold in the trust.
As a result, some families consider adding children’s names to parents’ non-registered investment accounts, for better or for worse.
Holding assets jointly with kids
Adding a child’s name to a non-registered investment account seems to be a common, albeit unnecessary, practice. Single seniors or widows often do this on their own or at the behest of their children.
One of the benefits is that children can then assist their parents, if they become unable to manage their own investments. However, a power of attorney document can accomplish the same thing as adding a child’s name to an account. And a power of attorney or a similar provincial estate document is necessary to deal other assets, including real estate and registered accounts. So, adding a child’s name to an account should be unnecessary and certainly isn’t a replacement to having a power of attorney.
Does joint ownership save on probate costs?
Another purported benefit is that joint ownership allows the account to avoid probate. Probate is the process of validating a will with the province to allow an executor to distribute an estate. Probate may take up to a few months after death, and it can have associated legal or government fees. Some provinces have no or nominal probate costs, while others have estate administration tax of up to 1.695% of the assets.
Joint ownership of assets between a parent and child may not avoid probate due to legal precedents, like the Supreme Court of Canada decision in Pecore v. Pecore. By default, there’s a presumption of resulting trust when a parent and an adult child own an asset jointly. It’s as if the child holds the asset or a portion thereof on behalf of the parent. And it may be that the asset should be subject to probate despite the parent and child owning the asset jointly with the right of survivorship. This means probate may not necessarily be avoided.
Does joint ownership save on income tax?
Owning a joint margin account with a child does not avoid the income tax payable at the time of the parent’s death, either. An account can only pass to a surviving spouse or common-law partner on a tax-deferred basis. When a child inherits an investment account or any other capital asset from a parent after the parent’s death, there’s a deemed disposition with capital gains tax payable. So, joint ownership with a child does not avoid income tax.
Some risks to be aware of
Finally, if your children are joint on your margin account, Chander, that gives them access to your money, whether you like it or not. And even if you trust them implicitly, what happens if they become incapacitated? The person acting as their power of attorney may contend that the joint account belongs to them as well. Whether they could do so successfully or not is another story, but it’s an example of how someone other than your children could suddenly be involved in your finances.
The same could be said if your child is sued or goes through a divorce. Joint ownership could expose your investments to your child’s legal issues.
In summary
You cannot name a beneficiary for a non-registered margin account, Chander, and adding a child’s name to the account should be approached with caution.
There are risks to doing so, and it will not save tax and might not avoid probate. Most importantly, adding a child’s name is not a replacement for a power of attorney, which you should have anyway.
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Read more about beneficiaries:
- How to stop procrastinating and cross two major money moves off your list
- How is a non-registered account taxed upon death?
- How does a spouse’s death impact your TFSA contribution room?
- What happens to a RRIF when the account owner dies?
The post Tax and estate planning for joint accounts appeared first on MoneySense.
Source
Author : Jason Heath, CFP