A question I come across regularly concerns the ideal setup for accounts for a couple. Alyx Valdal asked a version of this question recently in the Financial Planning Association of Canada forums, and it got me thinking.

I am going to argue here for a mix of accounts that relies heavily on joint spousal accounts. This should achieve some key risk management and estate planning outcomes while allowing for a mix of financial dependency and interdependency.

Before we get started, though, if you’re a financial planner or financial planning student ($30 memberships for students!), why aren’t you an FPAC member?

I’ve discussed chunks of this here and there in class, but never as a consolidated conversation. I think there is some value in having a somewhat standardized approach here.

Let’s start with some assumptions. This is a happily married or happily common-law couple. They are reasonably open with each other about their finances. They are roughly the same age. They don’t have substantially different estate plans. There is no impediment to information sharing between them. They are dealing with their financial planner or financial advisor as a household. I recognize that this won’t always be the case, and if not, then you may want to take a different approach.

Registered accounts (RRSP, TFSA, FHSA) should be simple. Name the spouse or common-law partner as beneficiary or successor owner on the account. (There are some nuances around FHSAs and RRIFs when it comes to naming either a beneficiary or successor, but we won’t delve into those here.)

I’m going to address two key problems here:

1.        Financial empowerment. We know there is benefit in both parties in the household having some degree of financial awareness. If one party is not involved in financial decision-making and finds themselves suddenly single, it does not bode well for that person’s financial future. This 2013 paper makes a strong case for a lack of financial literacy leading to worse outcomes in many cases.

2.        Estate planning outcomes. We don’t want funds tied up unnecessarily. I generally have no problem with probate processes, but probate is not necessary for most types of assets owned within a relationship. We pretty much always want to establish a seamless change of control from a deceased or incapacitated spouse to the surviving and healthy spouse.

There is no tax benefit to setting joint accounts up. The attribution rules will see that the person who is the source of non-registered investment returns is the one to pay tax on those gains, unless some income splitting tactic, such as spousal loans or second-generation income is being employed. We’ll assume there is no income splitting goal here.

For the sake of easy-to-follow examples, let’s name our couple. We’ll call them Anna and Bruce.

That leaves 4 major categories:

Bank Accounts

My preference here is probably going to be the most controversial of what I will present, but I believe makes sense given the reasons I’ve presented above.

I would prefer to see four accounts for a couple:

1.        Anna should have an account where she is the primary holder, and Bruce is a joint holder, in the second position. We’re going to see this pattern over and over again. The reason for this setup is to give Anna primary control and mark the account as hers.

Anna will receive whatever regular amounts are hers into this account. She will spend what she spends out of this account.

Putting Bruce here as a joint owner will allow him to access the account in case of Anna’s loss of capacity or some other emergency. Yes, they will have powers of attorney on each other, but those can take some time to properly execute.

2.        Bruce will have an account mirroring this. His regular income will be paid into this account, and expenses for which he is responsible will be paid from this account.

3.        Their first truly joint account will be used to manage household expenses. Any funds either contributes towards those expenses will be transferred here. If they are eligible for household-type benefits like the Canada Child Benefit, it will be paid into this account.

4.        Their second truly joint account will be their household emergency fund. This will be a pool of dollars that neither will touch except in an emergency. They will both contribute to it occasionally, ensuring that as household spending increases, so does their available emergency fund.

Real Property

I would prefer to see couples own real property (home, vacation property, etc.) jointly with right of survivorship. We most likely want both of them to be able to continue enjoying the use of the property if something should happen to the other.

There can be a lot of complexity here, such as when parents have to be on title for the kids to qualify for a mortgage. We’ll assume here that Anna and Bruce are able to qualify for a mortgage within their own resources.

Credit Cards

Keeping with the theme of building financial capacity for both of them, I would prefer to see each with their own credit card. For each of those cards, the other spouse should be an additional cardholder. This means both have independence in using their cards, but the other spouse can still access the account. Both will build their own credit history this way.

There is some caution required here. If Bruce is an additional cardholder on Anna’s account and he makes a bunch of purchases, it’s Anna’s sole responsibility to repay that debt. If she does not, her credit history suffers, but Bruce’s does not.

If the couple is concerned about building credit, they probably each need to be primary holder on two separate cards. Using two revolving credit facilities responsibly is the best way to build credit.

Investment Accounts

Similar to bank accounts, we’ll see the use of joint accounts here. This only matters if Anna and Bruce are opening non-registered accounts.

Anna will open an account in her name. Bruce will be a joint owner with right of survivorship. This won’t create any tax advantages, but if Anna predeceases Bruce, he becomes the owner of her non-registered assets without having to go through probate.

Bruce will set up a mirror image of this.

Summary

I’m not much of a fan of joint ownership outside of marriage and common-law relationships, but I believe it can be used well here.

There are additional considerations when it comes to spouses owning other assets such as life insurance and shares of a small business. We’ll deal with those in separate future articles.

If you have any comments about this, I would love to hear them. I’m sure there are factors I have not considered.