children. However, there are tax, probate and inheritance traps that can cause
The most common mistakes, which are often accidental and stem from a lack of
knowledge, result in inheritance conflicts, the payment of additional income
taxes and most importantly, prevent parents from achieving their goal of
maximizing their family’s wealth.
In most cases, a better tax strategy is for parents to keep the house in
their name until they die.
If you own a cottage, the same “phantom sale” results if you transfer it to
one of your children. In some cases this is a misstep, which results in a
pre-payment of tax.
In other cases, the transfer of a cottage is part of effective tax planning.
The idea is that you pay taxes now on the “sale,” so that future growth in the
cottage value accrues to the child instead of you. Rather than transfer the
cottage ownership, some parents obtain life insurance to cover the resulting
income tax liability upon their death. However, the cost of the insurance may
ultimately reduce the family’s wealth, so it is important to weigh these
options carefully. Read more about how to transfer a family cottage here.
As parents age, it is common for one of them to change their bank account (or
brokerage account) to a joint account with one of their children (called joint
tenancy), to avoid getting hit with probate fees. Despite creating a joint
account, these parents often continue to report the income from the bank
account on their own tax return. In essence, they just want to avoid probate
fees and not actually transfer half the bank account to their child.
This is a common misstep, since Canada Revenue Agency has said that when
someone just changes the name on a bank account, yet still has beneficial
ownership of the bank account, there is no true joint tenancy and the transfer
will fail to reduce probate fees.
So unless you transfer true ownership of the bank account – one indication of
this may be your child reports half the income on their return, you have not
minimized your probate fees or maximized your family wealth.
Another danger for larger families is that by listing just one child as a
joint tenant on the bank account, the child may consider the account theirs and
not their siblings, which can lead to estate litigation. Documentation of intention for the account is a must.
When considering changing an account to joint, parents should consider full
disclosure to all their children about their intentions and how the account
should be reported for tax purposes.
Jewellery, antiques and art
A significant misstep that can come back to haunt children is when parents
“pretend” they don’t own expensive personal items such as jewellery, antiques
and art. Some parents ignore these items purposely in their wills and rely on
an understanding with their family that these items will “walk out the door”
without being reported for income tax or probate purposes. As a parent you must
understand that if you name any of your children as executors of your estate,
you are asking them to evade income taxes and the law.
A simple way to avoid this misstep is to buy antiques, jewellery and art in
your child’s name originally, so that any appreciation in value belongs to
Too many people are ill-informed when it comes to taxes, probate fees and
estate law. They end up making serious blunders that inadvertently reduce their
family wealth. If you are looking for ways to pass your wealth to your
children, do some research and obtain professional advice before changing the
ownership of your most valuable assets.
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