Title: Parent-child joint accounts are under the gun
Sub-title blurb: Joint parent-child accounts are a popular tool to help manage an ageing parent’s affairs and finesse certain fee and regulatory issues. However two recent Supreme Court decisions have impacted their use.
When Paula Pecore’s father transferred a portion of his savings and investments into joint ownership with her, no one expected serious complications. Parent-child joint accounts are common and Mr. Pecore had indicated that he would provide for his daughter and her family after his death. The transfer seemed like a logical interim step.
Little did Paula Pecore realize that her joint interest in the account would spark a legal battle that would move all the way up the Supreme Court. Furthermore, the court’s decision in the case, Pecore v. Pecore, over who owns a parent-child account after a parent dies, is forcing investment executives, lawyers, accountants and estate planners to revisit the advice they give their clients.
According Marina Panourgias, a chartered accountant and senior manager with Deloitte who has researched Pecore v. Pecore and its implications, “disputes may arise with respect to whether the property was intended to be gifted to a particular child who held the account jointly or whether that property is actually held by that child in trust for the beneficiaries of the parents’ estate.”
In Pecore v. Pecore the question of ownership of the joint accounts became very real because after her father’s death, Paula Pecore’s marriage began to dissolve. During the divorce proceedings, the question came up as to whether she owned those accounts, or whether they belonged to her father’s estate.
A widely used financial planning vehicle
According to Panourgias, the case is important because joint accounts, which can encompass a variety of financial assets including cash, GICs and other holdings, are a widely used financial planning vehicle. “Issues regarding joint accounts come up all the time in our practice,” says Panourgias. “There are many out there with substantial assets in them.”
Joint accounts are popular for several reasons says Panourgias. “In many cases, people set them up to streamline administration,” says Panourgias. “For example for children who are taking care of an elderly parent, setting up a joint account is easier than arranging a power of attorney.”
Another big advantage of joint accounts is the fact that they are often used to side-step probate fees. The probate process validates that a will is indeed a person’s last will and testament and that the executor is validly appointed. It provides insurance to third parties that they can indeed safely convey a deceased’s assets. In fact, financial institutions in Ontario will generally not transfer financial assets between accounts worth more than $30,000 unless a will has been probated.
However the fees that are attached to the probate process can be pricey. For example these fees in Ontario are 0.5% on the first $50,000 of an estate’s value and 1.5% on amount over that. However in many cases after a death, assets that are in joint account pass directly to the co-owner, making probate fees unnecessary.
Ownership of joint accounts upon a parent’s death
According to Panourgias the heart of the issue in Pecore v. Pecore was the parties’ intent. “Were both legal and beneficial titles intended to be transferred to the child? Or only the legal title?,” she asks rhetorically. During roughly the same time period, the ownership issue in joint accounts also came up before the Supreme Court in another case, Madsen Estate v, Saylor, though ironically the court ruled differently in both cases.
According to Panourgias, the Pecore case was more important, because in its decision, the Supreme Court provided guidance and other guidelines regarding how the transferor’s intention should be determined in future common law decisions. Henceforth the court will presume that all transfers made by parents into joint accounts with their children are not intended as gifts, unless the transfer is made to a minor child. From now on, the onus is on transferees to prove that they intended to for the amount to be a gift.
According to Archie Rabinowitz, a lawyer with Fraser Milner and Casgrain, courts will consider several factors when assessing who should get ownership of joint accounts assets after a parent dies. “The different conclusions in the Pecore and Saylor decisions turned, at least in part, on the credibility of oral evidence regarding the intentions of the transferor,” wrote Rabinowitz in a detailed commentary on the cases. “In Pecore, testimony provided by the transferor’s lawyer was deemed to be disinterested and credible, whereas the trial judge in Saylor found the testimony of the transferee to be “evasive and conflicting.”
Another key factor in establishing ownership of joint accounts is who pays the taxes on the revenues stemming from them. For example in the Pecore case, the father continued to control the accounts and he declared and paid all of the income taxes on the revenues that they generated. This was a clear indication that they were not being gifted to Paula Pecore immediately, even though she was permitted to withdraw funds from those accounts provided she notified her father in advance.
However the fact that Mr. Pecore also made Paula and her husband residual beneficiaries in his will, but that he did not include the joint account as part of the assets, was interpreted by the courts as evidence that he intended that the funds in the account flow directly to her upon his death.
Estate planners beware
According to Margaret O’Sullivan, a principal in O’Sullivan Estate Lawyers, a trust and estate boutique law firm, the Pecore v. Pecore and Madsen Estate v, Saylor decisions were very narrow in scope, however their implications are profound: those who transfer assets into joint accounts need to make their intentions clear, otherwise they take a risk that their wishes will not be respected.
“What is interesting is that when you open a joint account, the banking forms often include a box that you can check off to indicate your intentions regarding the rights of survivorship. However the courts have concluded that this evidence alone is not necessarily conclusive,” said O’Sullivan. “As a result when I put together a will I often include a statement that clearly identifies what is to become of the assets in a joint account once the parent passes away.”
According to Panourgias, it’s important to remember that neither the Pecore v. Pecore nor the Madsen Estate v Saylor decisions apply in Quebec (where probate fees are also non-existent) due to the fact that the province is governed by civil not common law. As a result, she suggests that Quebecers holding or considering opening parent-child joint accounts, consult their legal advisors beforehand.
A commentary by Archie Rabinowitz of Fraser Milner Casgrain LLP regarding the implications of Pecore v. Pecore and Madsen Estate v. Saylor decision is available on the firm’s Web-site at:
Other clarifications on the implications regarding the use of joint parent-child accounts can be found the Deloitte Web-site at: http://deloitte.net/dtt/newsletter/0,1012,cid%3D165571,00.html
Peter Diekmeyer is a Montreal-based freelance business and economics writer.
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