Can I avoid Estate Tax by putting my child on title to my home with me?

Written by Owen Thompson on November 25, 2016

Can I avoid Estate Tax by putting my child on title to my home with me?

We all like to avoid paying taxes and the idea of being taxed because you died seems even more distasteful. So what can you do to get the bad taste out of your mouth? Conceptually, the answer is fairly simple. You go to a lawyer’s office, a child in tow, and instruct the lawyer to prepare and register a deed putting your child on title with you as a co-owner. Voila! If you die, the child is the legal owner and can deal with the property without paying estate tax. Problem solved.

But wait… is it really that simple to avoid a tax that arises on death? To answer that question you first need to understand a bit of the complex relationship between real estate law, tax law and estate law because registering a child on title to your property has legal implications in all of these areas of law.

So lets start with the death tax that you are trying to avoid. In this case, the Province of Ontario requires that, subject to a now very unusual exception, if you own property when you die your executor, or other person who administers your estate if you did not leave a Will naming an executor, must apply to the Superior Court of Justice to be appointed as the Estate Trustee (Executor if there is a Will and Administrator if there is no Will) in order to deal with the property. The fee that is paid to the Court for issuing a Certificate of Appointment is calculated based on a percentage of the value of your estate, of which your home will be a part. For any value on your estate over $50,000.00 your Executor will pay 1.5% of its value to the Court. So if you have a $500,000.00 house in your name as the sole owner when you die, in order for your Executor to sell or transfer the property to someone, they will pay  $7,500.00 of fees (ergo “taxes”) to the Court in order to obtain the Certificate they need to do so.  This is the tax we are trying to avoid paying and is probably more familiar to the average person by its old name, “probate fees”.

So, you ask, why does adding a child on title with a parent not solve this problem and avoid the probate fees? Well the answer is really more a list of potential problems that adding a child on title can create such that adding the child is only a part of the solution to avoid this death tax. So what possible problems could arise out of adding a child on title? The list includes the following issues but is not limited to them:

1. The parent wants to sell the home in the future but, due to a falling out with the child on title with them, the child refuses to cooperate in selling the property or negotiates for a portion of the equity;
2. The parent encounters financial issues and needs to take out a mortgage/refinance the property. The child will have to be on the mortgage and being liable on one mortgage may impact their credit such that they will not be able to qualify for a mortgage to buy their own home in the future;
3. The child encounters financial issues and has creditors pursuing them to try and collect monies the child owes. To the creditors, it will appear that the child has a very nice 50% share of the parents house that can be used to pay the child’s debts;
4. The child may be called upon to pay for debts/obligations of the parent related to the property. Debts such as property taxes, maintenance and repair and insurance would be potential debts that may not legally attach to the child but morally may be pressing on the child. Other debts such as a construction lien registered against the property by a contractor who has supplied labour and/or materials and not been paid will result in the child being personally sued as a registered owner. Similarly, if a third party comes onto the property and is injured in a slip and fall type accident, they may very well sue for their injuries and name all registered owners, including the child, as defendants in the law suit;
5. The child may have their own home that they claim as their principle residence for tax purposes and the parent’s home will likely be the parent’s principle residence for tax purposes. Adding a child on title for effectively half the ownership of the property may make result in the parent loosing half of the home as their principle residence and the child having half the home as an investment on which they will then be assessed capital gains tax;
6. The child may not have ever owned a home of their own at the time of going on title and may subsequently wish to purchase a home of their own, claiming up to $2,000.00 in Ontario Provincial Land Transfer Tax refunds for being a first time home buyer. But going on title to the parent’s home potentially means they are not a first time home owner in the government’s eyes;
7. If the child is not the sole child or beneficiary that is intended by the parent to receive the home, the child may, after the death of the parent, attempt to (and be successful at) keeping the house to themselves and not sharing the value of it with other children or beneficiaries that the parent intended to benefit;

The foregoing are just some of the potential problems that can arise out of the simple solution of adding a child on title with a parent to avoid the probate fees arising out of death.  As with most legal problems, you have to look at the issue like a pebble being dropped in water: you have to consider not just the center of impact between the rock and water but also consider all of the ripples in all directions as well.

So how do some people manage to get away with putting a child on title to avoid probate fees? Mainly in one of two ways: 1) they are very lucky that they put the child on title and none of the above problems emerged. 2) Good planning.

We at Thompson Law Professional Corporation do not believe our clients’ want to rely on “luck” when it comes to estate/tax/real estate planning and we prefer to provide our clients with the proper advice for accomplishing this goal. Typically we will discuss with our client their goals and individual circumstances to develop a plan that is right for them. This plan will normally involve three things:

1. the preparation of a trust agreement that establishes that the child is going on title in trust for the parent and that the parent remains the 100% beneficial owner of the home despite the child being a registered legal owner of it. The trust agreement will clearly set out any and all obligations and rights of both the parent and the child including what is to happen to the home in the event of the parent’s death.
2. the preparation of two Will’s for the parent, one Will being for assets that will not require probate (including the house with the child on title) and a second Will that can be probated and include other assets of lesser value to keep the probate fees as low as possible;
3. a deed putting the parent and child on title together.

With the world on the verge of the largest transfer of inter-generational wealth in history as baby boomers age and pass away, leaving their wealth (often represented largely by their home) to their children, many are actively seeking to avoid those probate fees and other taxes via good estate planning. If this sounds like you, we would be pleased to talk with you about achieving your goal.

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