Blended Family, Joint Ownership, and the Cottage
Lena, 62, is remarried to Sam, 65. Lena has two adult children from her first marriage, ages 34 and 31; Sam has one adult child, 29. Lena owns a house worth $950,000 titled solely in her name, a cottage worth $600,000 with an ACB of $150,000, a RRIF worth $500,000 with Sam named as beneficiary, a TFSA worth $120,000 with no successor holder, and a $250,000 life insurance policy with her estate as beneficiary. Her will, drafted 15 years ago, leaves everything to Sam, then to Sam's child. Lena wants her own children to receive the cottage and believes Sam will "do the right thing." Sam has $300,000 in RRSPs and a pension. Lena's health is declining. The province is Ontario. Probate fees are approximately 1.5% on estates over $50,000. Lena asks whether she should add Sam as joint owner of the house and cottage to avoid probate.
1. Identify the estate-planning problems in Lena's current plan.
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- The will defeats Lena's objective. Everything passes to Sam and then to Sam's child, so Lena's children may receive nothing from the cottage or the residue.
- The cottage has a large unrealized gain. With a $150,000 ACB and $600,000 value, a $450,000 gain will be taxed at death unless a rollover or exemption applies.
- Probate exposure. The house, cottage, TFSA, and insurance proceeds payable to the estate may all be subject to Ontario estate administration tax.
- Beneficiary designations are inconsistent. The RRIF passes to Sam outside the will, but the TFSA has no successor holder and the insurance is payable to the estate, which increases probate and creditor exposure.
- No trust or equalization plan. There is no structure to give Sam income or use of assets while preserving capital for Lena's children.
- Joint ownership is being used as a probate shortcut without considering control, family law, creditors, and the cottage gain.
2. Evaluate Lena's proposal to add Sam as joint owner of the house and cottage.
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Joint tenancy with right of survivorship can avoid probate because the asset passes outside the estate, but it is a blunt instrument.
House. Adding Sam may avoid probate on the house, but it gives Sam legal ownership and control. If Sam remarries or changes his will, Lena's children may lose the house. The principal residence exemption may shelter the gain, but the control issue remains.
Cottage. Adding Sam is a disposition of an interest in the cottage. A spousal rollover may defer the gain, but Sam would then own an interest that he could leave to his own child. The cottage's $450,000 accrued gain is not eliminated. Joint ownership may also expose the cottage to Sam's creditors or family-law claims.
Probate savings versus loss of control. The potential probate saving is roughly 1.5% of the value passing by survivorship, but the cost in lost control and unintended beneficiaries can be far larger. Lena should not add Sam to the cottage without a trust or agreement that legally binds Sam to leave the cottage to her children.
3. Recommend an estate plan that meets Lena's objectives with minimal tax and probate.
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- Prepare a new will with a spousal trust: Sam receives income or a right to use assets for life, and the capital passes to Lena's children on Sam's death. This protects the cottage and balances the blended family.
- Consider a separate secondary will for assets that do not require probate, such as the cottage or private company shares, with legal advice. Not every asset can avoid probate, and land transfers may still require probate.
- Name beneficiaries deliberately. Make the RRIF and TFSA payable to Sam only if that is intended; consider successor-holder or beneficiary designations for the TFSA. Name a trust or the children as beneficiary of the life insurance rather than the estate, to avoid probate and creditors.
- Use insurance to fund the tax liability on the cottage and to equalize inheritances between Lena's children and Sam's child.
- Do not add Sam to the cottage as a probate shortcut. If joint ownership is used at all, support it with a written agreement and legal advice.
- Review powers of attorney and health-care directives while Lena has capacity, and document her wishes with her children present if appropriate.