Buying a home, particularly a house, has become more expensive over the last few decades as the gap between the average income and the average home price in most jurisdictions in Canada has increased dramatically. With inflation thrown in to increase the cost of food and other necessities, homeownership seems like an impossible dream for first-time home buyers in 2025.
This blog explores some of the options available to parents to help their kids enter the real estate market either during a parent’s life or after death, and how each option may affect estate planning. For simplicity, let’s assume that each situation described involves a family with two children we’ll call A and B, and a parent or parents we’ll call X.
The Bank of Mom and Dad
If X dies with an outstanding loan to A, a will can detail the outstanding amount of the loan, the interest rate if any, and how that loan should be treated on death. Without a will, A and B are left to fight over what should be done about the loan. Should the loan be forgiven and forgotten on the death of the parent? This would really annoy B, whose inheritance has been reduced by A’s loan. Should the loan be included in A’s share? How will A prove that the loan has been repaid in full?
How does B, who wasn’t offered a loan, react to this arrangement when it comes to light? In the absence of transparency with all siblings, good record keeping, and professional advice and will preparation, loans to a child are fraught with the potential for family friction over money while a parent is alive, and delays or even litigation of the estate after the parent’s death.
Parent as Guarantor
If X acts as a guarantor for A’s mortgage, X assumes responsibility for the debt if A cannot pay, but is not added to the home’s title. If A loses their job and cannot pay, X is on the hook to pay the mortgage, or A must sell the property. If A is not willing to sell, all of X’s options will affect X’s credit score and retirement savings. If X is on a fixed income, or becomes incapable, this could put X in a very precarious financial position. If the situation reduces B’s inheritance or if B is relied upon to bail out an insolvent X, the sibling relationship may be irreparable even before estate administration is at hand. During administration, X’s estate planning may be impossible to execute as planned if some gifts have been liquidated to pay bills.
Parent as Co-Owner
If X is providing some purchase funds, it seems like a prudent idea for X to take an ownership interest in A’s property. As a co-owner, X will be able to veto the sale or further mortgaging of the property. Often that ownership interest is a 1% interest in the property as a tenant in common, but it could be significantly more, or even joint tenancy.
Tenancy in Common
Where X has a 1% interest in A’s property, when X passes away that 1% interest must be probated as a part of X’s estate. A will not be able to “deal” with the property until the property is probated. A “dealing” includes a sale or refinance, so it is important to ensure that both X and A understand the consequences of co-ownership as tenants in common on death.
Joint Ownership
Where X has a property and is convinced to add child A as a joint owner for convenience to pay bills, it may be assumed by A that they have outwitted B. A may assume that probate will not be required, and that B can do nothing about this because it is separate from the will, which divides X’s estate equally between A and B.
However, the law presumes bargains, not gifts, so the common law and B would disagree with A’s assessment. B could argue that X never intended to gift the property to A, that A was added to title gratuitously because the transfer was intended to be for convenience and entirely for the benefit of X. Under this set of circumstances, trust law presumes that B is correct and that the property should be returned to, or result back to, X’s estate. This is a trust law concept called a resulting trust, and it applies not only to real property but also to bank accounts where a parent adds an adult child as a joint owner, but the child gives nothing to the parent in exchange. The child has legal ownership (their name is registered on title), but beneficial ownership is not transferred and is held by the parent. Put another way, the child is added to title in name only, for the benefit of the parent.
Gifting the Cottage
Leaving a family property of great financial and great sentimental value to both A and B in equal shares can work. Unfortunately, it often creates friction between personalities and arguments over the cost of upkeep, over how the cottage is used, and over when it must be sold if the property taxes and other costs become too expensive to carry.
Gift in Will to One Child
X could gift the cottage to A in their will, with the intent that the value of the cottage on death will be part of A’s share of X’s estate, and that B will receive a sum equal to the cottage’s value. Problems arise with this “hotchpot” planning where, in the years after the will was prepared, the cottage has grown in value to be worth $2 million, but the rest of the estate is worth only $600,000, so equalization between A and B on the death of X is impossible.
Cottage Trust Arising on Death
Another option is to create a cottage trust in your will, along with a cottage fund to pay for cottage expenses. A trustee will make all the decisions about the cottage, they will ensure that it is maintained and implement a fair use schedule. But a cottage trust solution presupposes that X’s estate has the funds necessary to set up the trust and fund the cottage trust to pay for professional services to keep it in compliance with the Canada Revenue Agency, to compensate the trustee, and to pay for general maintenance and capital expenses. A cottage trust with a cottage fund is only available where X’s estate is sufficiently large and liquid to accommodate these expenses.
Professional estate planners know how to avoid pitfalls and create successful estate plans where parents have helped their children to get into the rising real estate market. If you would like to speak with an experienced estate planner, please reach out to Robin Hammond.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 140 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
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