A previous common practice of putting children on family properties is now causing conflicts with current laws.
What has happened in the past is that children would be put on the title for the family properties for the purpose of moving the properties to the children seamlessly for estate purposes. The thought was that the children then could take over the family property, generally a family cottage, with little hassle when the parents are no longer able to manage the property.
Conflict with tax law
Doing so creates issues with tax law. This maneuver is an attempt to circumvent the deemed disposition of the property on death. While the parents can “gift” the property to the children, the property is deemed to have been sold at fair market value at the time this occurred. If this did not happen (and the tax department actually keeps these details on file,) then the capital gains can be significant.
Another problem is if the property is sold after the addition of the child, but before the child receives the full ownership of the property. For example, if the child was put on the title when they became of legal age, then the property is sold decades later, the child isn’t aware that they have to declare that sale on their tax return. This has been required in Canada for the past few years and there are several people who have discovered that they didn’t declare the sale when they should have. Or the child wasn’t called into the meeting to handle the sale of the property to the new owners, rending the actual sale at risk!
Property ownership issues
It is equally possible that the parents may have financial difficulties while the child has been put on to the property title. As a result, the municipality and/or mortgage company may seek redress from the child for outstanding debts that the parents were unable to pay. This is a concern that all individuals who are on title should be aware of as it does impact their personal credit risk. Lenders are increasingly wary when people have their name on multiple titles.
Conflict with estate law
Another issue that has come up is the conflict with estate law, specifically probate. While this isn’t an issue in some jurisdictions, others have indicated that they consider the placement of children on title for the purpose of transferring the property outside of probate is possible fraud. I am not presently aware of any court cases which have settled this situation, but it is another risk that people should be aware of.
This article touches on some legal matters which is better addressed with your legal adviser to provide specific and personal advice for your personal situation. It is only an introduction to the matter and is not intended to replace legal advice from a lawyer or other member of the legal profession.