Prior to registering assets in joint names, you should consider the tax rules. Unfortunately, tax implications are often overlooked which can result in a significant tax debt.
If beneficial ownership of an asset is changing, there is a disposition for tax purposes which will result in several implications:
- If there has been a gain on the asset being transferred, the gain will be realized and tax may be owing. For example, if an investment portfolio is transferred from sole ownership to joint ownership with an adult child and beneficial ownership is transferred, ½ of the accrued gain will be realized for the initial owner.
- In this example, going forward, the adult child should be reporting 50% of the future investment income earned on the portfolio.
- If 50% of the beneficial ownership of a principal residence is transferred to an adult child, the ½ held by the child may not be eligible for the principal residence exemption on any future gain and thus be taxable.
Often when the tax rules above are ignored, beneficial ownership may not be properly transferred even though the intent may have been to transfer the beneficial owner.
If you are putting assets in joint names, seek out qualified advice from a tax expert and document your intentions. We have seen numerous situations where a parent dies with assets held jointly with one child, and a dispute arises with other family members as to whether that asset is part of the deceased’s estate or not.
Taylor Leibow has one of the largest tax teams in the region – reach out to us for professional advice.