Tax for Estate Planners: Gifting Rights of Survivorship and Some Tax Drama

This note has some tax drama.

There’s a real estate transaction, called gifting rights of survivorship, that has become increasingly common in recent years. It’s one that I had thought impossible (and, incorrectly, still do).

It’s specifically for estate planning, letting a client avoid probate fees while simultaneously retaining the principal residence exemption (not a simple feat otherwise).

In this note I’ll discuss the basis for the transaction and catch you up on the drama.

Disaster story

In a note from a few years ago I set out a “disaster story”. I began, snarkily:

I can’t tell you how many times I’ve heard in my practice that someone’s elderly parent has put their child jointly on title to “avoid probate fees”.? I’ve heard this from clients, sure, but I’ve seen the same mistake made by lawyers and accountants. You might avoid probate fees. But you might not. And what’s worse (disastrous even) is you might lose something vastly more valuable than a few percentage points of probate fee savings: the principal residence exemption.

The issue, I wrote, was that if you make your child a joint tenant with you, you’re either transferring half of the beneficial ownership to the property or you’re not. If you’re not doing so, then you still have to pay probate fees (without further planning). If you are doing so, you lose half of the principal residence exemption going forward. In short, the transaction, used improperly, is useless!

However, it turns out that I wasn’t aware of a third option, “the have your cake and eat it too” choice: gifting rights of survivorship.

Gifting rights of survivorship

Recent case law has indicated that there are actually three options on transfer into joint tenancy:

1. True joint tenancy (half legal interest, half beneficial interest for both A&B);
2. A resulting trust (full beneficial interest for A, A&B half legal interest); and
3. Gift of the right of survivorship (beneficial interest to A, A&B half legal interest, beneficial interest goes to B on A’s death).

I wasn’t aware of this until relatively recently. I’ve had clients who ask me to draft magical deeming rules whereby something is considered to have happen before a trigger: i.e. A dies, but just before she dies, her interest is transferred to B. That’s what this felt like to me (still does!)—in large part because the case law, from what I’ve read, does not sufficiently justify a mechanism whereby beneficial ownership would change in these circumstances. It’s left to magic!

Drama

I’m not alone in this view. Joel Nitikman, in his excellent paper “The Wrong of Survivorship” goes further. He doesn’t think there’s any such thing as a “right” of survivorship, and thus that it can’t be gifted. In his view, the shift in beneficial ownership on the death of a joint tenant is a “result” or “incident” of survivorship which follows from joint tenants having a unity of interest. Each held the entire interest before, and the survivor continues to do so after, without an enlargement of her interest.

Therefore, in Joel’s view and mine (and contrary to those of many judges) it’s only options 1 and 2 (maybe not even option 2), and certainly not option 3.

But we’re wrong!

Fortunately, he’s “wrong”, and so am I (at least so far as precedent goes). Feel free to make use of this odd new mechanism, and hope that the brilliant Mr. Nitikman does not win a SCC appeal overturning it.

Happy to discuss this, or any other tax question for that matter! I can be contacted directly at [email protected] or 604.425.1123.?