The Appellate Division of the New York Supreme Court released a decision last week that confirms old law related to joint bank accounts. It is not that this decision is particularly earth-shattering, but it does give an opportunity to discuss the issue as clients are trying nowadays to find ways to protect their assets.
Joint ownership is a concept by which two or more people jointly own property (either real estate or personal property). They are each allowed to use the property equally and neither has a specific half-interest (third-interest, quarter-interest, depending on how many people we have) and upon the death of (the) one joint holder the other(s) get the property by right of survivorship. This means that if Mr. A and Mrs. B hold jointly and Mr. A dies, then Mrs. B becomes the sole owner. Similarly, if Mr. A, Mrs. B and Ms. C hold jointly the each has an undivided one-third interest and if Ms. C dies, the Mr. A and Mrs. B continue to hold jointly as to an undivided half-interest each.
So, let’s go with an example. Suppose your business is in trouble and has not paid on some contracts and there is a good chance that it will be sued. Let’s suppose further that the company cannot afford to fight the lawsuit so a default judgment will be obtained against the company. Let’s also suppose that you were concerned about this a while ago so you put the company’s bank account in the joint names of yourself and your company and the same for any real estate owned by the company.
In Ontario, the law used to be that you could not garnish a joint bank account to satisfy a judgment but it has since been changed so that only 50% (or 33%, 25%, etc.) of the joint bank account can be taken. In New York, the banks are often not willing to turn any money over to a creditor from a joint bank account – although there are then additional problems because the account is usually frozen so money can go in but cannot go out.
In some instances, it might be appealing to think of having a joint account so that, in Ontario, only 50% can be seized by the creditor while in New York potentially nothing can be seized (although it could be frozen – but you could at least protect the money to some extent from the creditors). Alternatively, for real estate, can you have the property go to you from the joint tenancy if the company is ever dissolved? In New York, the answer as shown in the recent case is “no” whereas the answer in Ontario is “yes”.
The New York court has affirmed the principle that joint ownership will only exist where there one is dealing with two or more individuals. In that case, the joint ownership was between an individual (who was an executor of an estate) and with the estate itself. The Court held that since the estate was not an individual, there could not be a joint ownership.
The law in Ontario is different since Section 43 of the Conveyancing and Law of Property Act not only permits joint tenancy between a corporation and an individual, but it also specifically provides that upon dissolution the property flows to the individual by right of survivorship.
Now, I don’t want everyone running out and talking to their lawyers about how they can try and protect assets through joint ownership between themselves and their companies because more than just the Conveyancing and Law of Property Act applies. Other legislation can come into play, such as the Assignments and Preferences Act, the Business Corporations Act and even the Bankruptcy & Insolvency Act, which can greatly affect the success of any such arrangement. But, depending on the timing and the circumstances, it may well be possible to effect an arrangement to protect assets from creditors.
Similarly, it may be a manner of avoiding probate fees if you were to take, for example, the family home and transfer it to yourself and your holding company so that when you die the holding company gets the full property on right of survivorship. You would then have your beneficiaries as the shareholders of the holding company. Again, though, this would be something to talk about more in depth with your wills and estate lawyer. But, it is something to at least think about.