It is important to consider estate planning objectives when entering into real estate transactions. For example, a client may intend to retain control of real property in that they intend to be able to dispose of it on death. However, if the relevant estate planning objectives are not identified and considered at the time of the transaction, other goals may be prioritized instead; this may result in the structure of the transaction being inconsistent with such estate planning objectives.
However, even if a completed real estate transaction results in a structure that is disharmonious with estate planning objectives, during the estate planning process we may nonetheless be able to restructure real estate holdings to better achieve clients’ intentions. Let’s look at the common example of parents having a home legally owned by a child (the “Home”) in order to take advantage of the child’s first time home buyer rebate for land transfer tax purposes, despite the parents having actually funded the purchase of the Home. If this occurs, there are options to ultimately achieve clients’ estate planning intentions.
Below I will discuss two options, their advantages/disadvantages and their relevant estate planning considerations: namely, transferring the Home into the parents’ names, and registering a mortgage on title. For the purposes of the discussion, consider that there are two parents (the “Parents”) and two children, with the Home in the son’s name (the “Son”) and not in the daughter’s name (the “Daughter”). The Parents intend that both children benefit equally from their estate. The below is a high-level summary, is not providing legal advice and is not exhaustive in noting all options and considerations (e.g. cross-border issues, family law issues, etc.).
- Transferring the Property into the Parents’ Names, Jointly
An option is for Son to gift the Parents’ the Home, jointly (the “Joint Gift”). If this option is chosen, consider whether Son will need to get independent legal advice (“ILA”) or sign a waiver of ILA.
A primary advantage of the Joint Gift is that the Parents will acquire control of the total value of the Home and can dispose of it as they desire under their Wills. In addition, the Joint Gift may not incur tax liabilities. As it is a gift with no consideration, land transfer tax may not be owing, and, while there may be capital gains, the Son may be able to declare the Home as his principal residence for the purpose of using the principal residence exemption (“PRE”).
Consider the advantages of owning the Home jointly, such as for ease of administration and probate fee savings on the first death. I may weigh those against risks and broader estate planning intentions.
On the will drafting side, does the Son reside in the Home? If so, do the Parents intend to provide the Son (and/or the Daughter) with an option to acquire the Home in full or part satisfaction of their interest in the Parents’ estate? If ‘yes’, there are many considerations. For example, will there be sufficient liquidity in the estate to equalize under the wills? If a beneficiary has to expend their own funds to acquire any part of the home from the estate—as opposed to it being acquired as part of their share of the estate—land transfer tax may be payable. In addition, will there be a credit to either of the children? If the Son has put money into the home (e.g. mortgage payments, renovations) this may have to be factored into the equalization calculation.
This restructuring will only be successful if the Son agrees to gift the home back to the Parents. Otherwise, there may be a dispute as to whether the Son was actually gifted the Home or the funds to acquire the Home, or whether this was meant to be held in a trust relationship.
Consider also whether the benefit of the PRE may be lost (i.e. if the Parents own multiple properties, whereas if title remained in the Son’s name he could use his own PRE). Are there any holdbacks to consider that the client will take issue with? What about creditor risks and existing family law claims that the Son may be subject to? If the Home is the Son’s matrimonial home with his spouse, the spouse may be able to object to any disposition of the Home. Lastly, if the Home is held in the Parents’ personal names, probate fees will be payable sooner than if held in the Son’s name (assuming the Parents die before the Son).
- Register Mortgage on Title to Secure A Loan Agreement
Another option is to consider whether the Parents assisted the Son with acquiring the Home pursuant to a loan arrangement. If so, can a mortgage be registered on title to the Home to secure the loan agreement (“Registering a Mortgage”).
Registering a Mortgage would allow the Parents to protect the amount of the initial funds they transferred to the Son for the acquisition, and they could dispose of the mortgage pursuant to their intentions under their wills. This also may allow the Son to retain the benefit of PRE on the Home’s increase in value (as he will be the owner of the Home and presumably he does not own any other homes with a higher increase in value).
Depending on how the mortgage is dealt with on death, there may be land transfer tax owing on the value of the mortgage on the surviving parent’s death.
With Registering a Mortgage, consider whether the Son should make regular, non-nominal interest payments to the Parents to prevent an argument that the Home really is a gift to the Son and thereby part of his property to be subject to potential family law claims. Interest payments would be considered in the Parents’ taxable income.
In addition, while the amount of the mortgage would be secured by the Home, due to mortgage rules the Parents would not be entitled to any increase in value of the Home over and above that amount; the Son, as owner of the Home, would be entitled to such increase in value.
Lastly, if the Parents’ testamentary intentions are to treat their children equally, they may wish to consider, with this option, if the mortgage should be forgiven on death and fair market value of the Home equalized with the Daughter on the surviving Parent’s death. Again, this may be a fairness issue if the assets of the Parents’ estates are not sufficient to provide for the Daughter’s entitlement pursuant to such equalization.