Home co-ownership can cause estate-planning havoc

Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.

As more Canadians buy houses with family members or friends for affordability reasons, advisors say a concrete plan is needed in case one of the homeowners on the title passes away.

Drafting a co-ownership agreement is the first step, says Christine Van Cauwenberghe, head of financial planning at IG Wealth Management in Winnipeg.

She offers the example of a multigenerational home in which two parents own a house with their adult daughter. When one parent dies, who receives their equity portion? And when both parents have passed, does the daughter receive the full equity, or is it divided among other children who weren’t part of the housing arrangement?

“There are endless possibilities,” she says. “All property owners should understand the intended outcome in the case of a death.”

Matt Trotta, vice-president of tax, retirement and estate planning at CI Global Asset Management in Calgary, says estate planning with multiple owners on a property has been a growing area of his practice. In general, property is held in two ways – joint tenancy or tenants in common.

In a joint tenancy, two or more people own an undivided interest in a property. This means that when one person dies, their interest goes to the surviving joint tenant(s) and not to the deceased’s estate, Mr. Trotta says. Going this route, which is the most common for spouses, allows the other owners to bypass probate when one owner dies.

However, for joint tenants who aren’t married or common-law partners, there’s generally no tax rollover treatment, he says. That means that, for tax purposes, the deceased owners are deemed to have disposed of an asset, which can be taxable when the property isn’t a principal residence.

In the case of more than two owners, the last person to die will generally be the ultimate owner and the one capable of passing the property in their will.

“You’re seeing some unforeseen results on that sometimes, where people don’t realize that they’re generally unable to pass on an interest in joint tenancy unless they are the last to pass away,” Mr. Trotta says. So, the joint tenant who predeceases the other co-owners loses out, he adds.

With tenants in common, agreements can define how interests may be passed on and whether there’s a right to purchase or a requirement to sell. But this option is also not without pitfalls.

“When somebody dies, their ownership interest goes to somebody else, who is named in the will,” Mr. Trotta says.

That person may choose to live in the house and not get along with the other owners. Or the person may want to sell their stake, which affects the other owners who may not be in a financial position to buy that person out. Mr. Trotta has seen situations in which the new owner has creditor issues, for example, which affects the other owners as a creditor may attempt to seize the property to satisfy a claim or judgment.

“This is common in cases in which family members buy properties together and don’t necessarily get tax and legal advice,” he says.

Ms. Van Cauwenberghe notes strangers who buy property together to afford a home are more likely to hire their own lawyers who draw up detailed paperwork and run through multiple scenarios.

“They just tend to be a little bit more aware of the fact that they might not get along at some point,” she says.

Martha Adams, a certified financial planner in Guelph, Ont., says that when clients are planning to co-own a property, she ensures the necessary agreements are in place and tries to understand about their situation and what they hope to achieve as much as possible.

She recalls a client who was one of three co-owners. One co-owner died and the others hoped to buy out the deceased’s portion of the house and deal directly with the estate.

“That way, they didn’t have to deal with the beneficiaries and the estate needed money anyway,” she says. “It worked out well as everyone got along.”

But that isn’t always the case, and those situations often end up before the estate courts, racking up considerable legal fees, Ms. Adams adds.

“If the parties can’t agree, the one party who needs to sell needs to be able to convince a court that the property needs to be sold,” she says.

Scenarios like that get even more tricky when people own multiple properties together, Mr. Trotta notes. There can be issues with deemed disposition and deciding which property is the owner’s principal residence, for example.

“A lot of people buy property in other provinces or even other countries as a second property, which can complicate matters further,” he says.

For more from Globe Advisor, visit our homepage.