The Pitfalls of Joint Bank Accounts in Estate Planning

Do you hold a joint bank account with a parent? This is a common practice, often suggested to facilitate managing their money in times of incapacity or death. While this approach is convenient, these joint accounts often present more pitfalls than benefits. Let’s look at two common situations that may be problematic and a solution that is often preferable.

Joint Account as a Gift

The fundamental issue revolves around the question of whether the change in ownership constitutes a gift of property. In Canada, where there is no gift tax, there are no immediate issue. Down the road, when it comes time to distribute the inheritance, the question of ownership could become contentious. Should the funds in the bank account that now belongs to the adult child be included as part of the estate? Reasonable beneficiaries could disagree. This underscores the importance of documenting the intent behind the arrangement clearly. Without explicit documentation, the waters of ownership can become muddied.

Joint Account as a Trust

If the joint account is intended to grant authority to the adult child to manage the money, without transferring ownership of the funds, this results in a trust situation. When a trust exists, even without a formal declaration, there is an obligation to file documents with the Canada Revenue Agency (CRA). The CRA refers to this scenario as a bare trust, and they have introduced new reporting requirements for the 2023 tax year.

Specifically, all trusts, unless specific conditions are met, must now provide a T3 Return including additional beneficial ownership information on an annual basis. Additionally, bare trusts may now be required to file an annual T3 Return. As a result, many trusts that did not previously have to file are now required to file an annual T3 Return.” — CRA website

If a joint bank account between an elderly parent and an adult child is a gift of property, it could make the inheritance unclear. If it is a trust, it could result in annual trust filings. Nevertheless, it is possible to avoid the pitfalls of joint bank accounts by creating an enduring power of attorney.

Enduring Power of Attorney

The enduring power of attorney is a legal document that achieves the same objective of shared authority without any transfer of ownership. By granting the designated individual the legal authority to manage financial affairs as required, the parent retains full control over their assets, sidestepping the ambiguity of ownership and the associated tax reporting obligations. In this way, they can grant their adult child full authority to act in their name with respect to financial matters. Each individual's circumstances are unique, and a one-on-one consultation with a legal advisor is indispensable for drawing up the necessary documents and understanding the full implications of your course of action.

In estate planning, complexity often lurks out of view. While joint bank accounts may appear to offer a straightforward solution to the challenges of managing a parent’s money, the potential consequences underscore the need for careful consideration and expert guidance. By planning ahead and making informed decisions, you can avoid the pitfalls and still assist your ageing parents.

On our website, you can find more articles about estate planning and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.