We purchased our cottage in 1996 and placed it in joint ownership (husband and wife). In 2002, through our family lawyer, we made our youngest son the third owner on the deed. When we are deceased, will the cottage become solely owned by our son? (We have three other children.) Is capital gains tax owed in this scenario? Also, there is no mention in our wills of the cottage, so is it correct that it would not be included in the estimated value of our estate?
—Susan Heming, via e-mail
The simple answers? Yes, yes, and yes—assuming by “joint ownership” you mean the co-ownership is a “joint tenancy with right of survivorship,” as is usually the case between a husband and wife. (The other form of co-ownership is “tenancy-in-common.”) If you and your husband die before your son, the cottage will become his through right of survivorship, and indeed, capital gains tax is due, says Andrea P. Kelly, a lawyer in Markham whose practice focusses on estate planning and administration. While one-third of the tax would have been due when your son was added to the deed, you and your husband’s combined estates owe the remaining two-thirds of the tax after you die (unless the cottage was your principle residence, of course). And because your son would assume ownership of the cottage if you and your husband both die, no mention of the cottage in your wills means the cottage isn’t included in the estimated value of your estate. (However, as Kelly points out, “It’s not guaranteed which of the three current joint owners will ultimately survive to have sole ownership of the cottage.”) In the other co-ownership scenario, tenancy-in-common, there is no right of survivorship. If you and your husband both died, your son would still own his one-third of the cottage, and the four kids would inherit the other two-thirds collectively.
That said, “joint ownership alone doesn’t always determine that the property goes to the one survivor,” says Peter Lillico, a lawyer with Lillico Bazuk Kent Galloway in Peterborough who has expertise in cottage succession. What also counts is why you added your son as an owner in the first place. According to Lillico, sometimes parents add a child as a joint owner because they think doing so will save the probate tax when the child inherits the property (correct). Sometimes they add a child as a joint owner because they think it will avoid capital gains tax (incorrect). Regardless, “the intention of the decision matters,” says Lillico. If you made Child No. 4 an owner simply for tax reasons, and your will says that your assets should be divided between the children equally, one of the other kids could argue that, even if Junior is the surviving shareholder, you didn’t really intend for him to be the sole owner so, in reality, he’s not the only one who should get the cottage. Since you won’t be around to clarify your intent, this could lead to conflict between the kids, and then, says Lillico, “there are lovely lawsuits.”
If you do, in fact, want the cottage to go solely to your youngest because, say, you feel little Bobby is the only one responsible enough to take care of it in the future, make that intention clear to everyone now, says Lillico. No need to announce this at the next family reunion. Just put it in a written statement—any document will do. It doesn’t need to be notarized or even formal.