Who actually owns the house, or those shares of stock? It’s a big deal in estate planning

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Knowing who owns what is the first step to successful estate planning. What could be more obvious?

And yet, expensive and avoidable mistakes are made all the time. One client forgot to tell his advisor he bought a $5 million house for his daughter, missing out on helpful tax breaks and ownership arrangements that could protect the property from things such as marital breakdown. Another bequeathed to his children shares of a company that, after years of mergers, no longer existed.

Estate planning is not a set-it-and-forget-it scenario, especially where ownership is concerned.

“Understanding the ownership of assets is fundamental to successful estate planning,” agrees George Angelopoulos, vice president, tax, at Richter Family Office in Montreal. “Succession, both legally and from a taxation point of view, is obviously based first and foremost on the assets that an individual owns.”

One common pitfall is that clients can default to thinking: “I own it all, so what’s the problem?” says Annie Boivin, managing director, tax and estate planning, at Samara, a multi-family office in Montreal. As usual, the devil is in the details.

“I think it’s important for us to help clients realize, yes, they own all their assets, but the way they own them could trigger tax consequences, or legal consequences,” says Boivin.

“Your clients may say, ‘I have this building that I wish to transfer to this person.’ Many times we see that the building they wish to transfer doesn’t belong to them, it belongs to a corporation,” says Boivin.

Passing down a cottage

You can’t give away what you don’t technically own. And if the building that your corporation owns is a cottage that you occasionally visit, that could be a problem, too.

Jeremy Martenstyn, Toronto-based partner, private client tax services at BDO Canada, says clients frequently ask whether they can put their new vacation properties in a corporation. If there’s any personal use of the property, which there often is, the answer is “absolutely not,” says Martenstyn.

When it comes to vacation properties like cottages, Martenstyn adds that one of the biggest mistakes in estate planning is to assume your family wants to own it at all.

“Every parent wants the cottage to stay in the family, but the reality is, it’s very difficult for adult siblings to share ownership. It’s a minefield,” says Martenstyn.

If clients insist on passing down the cottage, a family trust will do the job.

“You put it in a family trust, which is good for retaining control of an asset, and at some point down the road transfer that asset to the beneficiary at cost,” says Martenstyn. Setting up a separate trust to pay for cottage upkeep is popular, too, and can smooth the road for future owners.

A well-structured trust is a helpful tool, but as Boivin pointed out, it’s important to remember that assets held in trust can’t be simply doled out in a will.

He didn’t have what he thought he had

Angelopoulos recalls one client who left generous monetary gifts to his children in his will, designating million-dollar disbursements upon marrying and buying a house.

“That individual had that in their will, which is fine. But the trust owned all the assets. So the individual actually only had bank accounts and a marketable security portfolio that had a total value of $500,000,” says Angelopoulos. “Now how do I give those kids the value he intended to give them, when the individual didn’t actually have that value in his hands and therefore didn’t have that value to give?”

Another pitfall Angelopoulos has seen is leaving shares of companies that no longer exist.

In one such case, “at the time somebody drafted the will, there were three or four companies, and over the course of time, corporate reorganization occurred and some of those companies amalgamated and one has been wound up,” says Angelopoulos.

No longer owning something is tricky, but the opposite sort of problem can happen, too, when someone casually acquires expensive new assets and forgets to alert their advisor. It happens, says Martenstyn.

“They may say off the cuff: ‘Oh, I bought my daughter a house and it closes in 30 days and here’s how I was going to do it.’ The whole thing is sort of an afterthought,” he says. Quite often, no planning has been done or the parents now have an additional property in their name, and they are missing out on key tax breaks.

Other ways of controlling assets

Parents sometimes retain ownership over property to assert control, but Martenstyn says “there are better ways to do that.”

Joint ownership would let parents keep some control and still allow the family to take advantage of the principal residence tax exemption if the children plan to live in the property. Martenstyn calls it the best deal that Canadian taxpayers have: “It’s a shame to let it go to waste.”

It’s important to keep in mind regional differences, too. You can own a property anywhere in Canada, but it will be subject to the laws of the province in which you made your will. Boivin points out that the Civil Code of Quebec has different ownership laws than the rest of Canada, which can affect estate planning.

“In the rest of Canada — not in Quebec — when you have a joint tenancy, you can have what you call a right of survivorship, which will help to reduce the probate and also to make sure that the asset is transferred directly from one spouse to the other. In Quebec, we don’t have this notion of beneficiary, so we cannot name a spouse as a beneficiary,” says Boivin.

Fixes exist for many ownership pitfalls that advisors encounter, but they say it’s much better to avoid them altogether.

“There’s a lot of things that can be done if you get ahead of it,” says Martenstyn. “It’s sometimes more difficult and more costly to try and undo, or fix, the planning.”