A Few Pointers on Probate
The Financialist • Issue 95 • October 2007
BY CHRIS EYNON CFP FMA
A financial plan can include many estate planning strategies such as Wills, charitable bequests, tax planning, medical directives, etc. One very important part is planning for probate.
WHAT IS PROBATE?
Probate is the legal process of validating your Will and confirming that the person who is named as your executor is the proper person to settle your estate. Your executor or lawyer will submit your Will and a list of your assets to the provincial courts. After the Will and the executor have been validated, the court will issue "Letters of Probate"; however, they will not do this until your executor pays your probate fees. Probate fees are levied on all the assets – above an exempt amount – that are disbursed through your Will. Probate fees vary from province to province and can be quite sizable. These fees can erode the assets you intend to leave to your beneficiaries.
Canadians have the ability to be strategic when planning for the disposition of their assets, and when working with a financial advisor and a lawyer, can create an estate plan to minimize or eliminate probate fees. There are numerous methods of bypassing probate, and it is important to realize that not every estate is the same; therefore, professional advice is necessary when creating your estate plan.
The following are some of the methods that can be used to reduce or avoid probate fees.
Gifts Prior to Death
Canadians are allowed to reduce the size of their estate by gifting their assets prior to death. There are legal requirements that must be met when gifting assets, such as fully relinquishing control of the assets. Gifting assets may cause a deemed disposition, so tax consequences must be taken into account.
Direct Beneficiaries
"Registered" plans such as retirement savings plans and pensions can have direct beneficiaries. You can name one or more beneficiaries and when you pass away these assets will pass along directly, thus bypassing the Will and avoiding probate fees. It is important to note that even though you have assigned a direct beneficiary on a "registered" plan, the assets are still taxable as income to your estate (unless the beneficiary is your spouse) – even though no probate fees will be charged. Because there will be income tax owing at the estate level, it is important to make sure that there is sufficient cash left in the estate to cover this.
Joint Ownership
Joint ownership can be a very effective way of transferring ownership of assets at death. There are two forms of joint ownership: Joint Tenancy with Rights of Survivorship (JTWROS) and Joint Tenants in Common. Although they sound similar, they are very different and care must be used to ensure your wishes are satisfied. The most common form of joint ownership in an estate plan is Joint Tenancy with Rights of Survivorship. This is often used when spouses invest non-registered or "open" money. An example of an open investment account would be "Mr. and Mrs. Smith JTWROS". When Mr. Smith passes away, Mrs. Smith will become the sole owner of the assets after a little paperwork is completed. The joint assets will not form part of the estate that passes through the Will, and thus no probate fees will be charged. Although this form of ownership sounds simple, care must be taken or you can expose the assets to unexpected risks such as loss of control, future litigation, tax consequences, and exposure to creditors. Even more care must be used with joint ownership between non-spouses.
Trusts
There are various forms of inter vivos trusts that can be used in an estate plan to help reduce probate fees. An inter vivos trust is one that is set up while you are living. The Canadian Income Tax Act allows for the use of formal trusts, two of which are "alter-ego" and "spousal" trusts. Assets can be transferred into a trust prior to your death. Once the assets have been transferred to the trust, they are considered to be owned by the trust and no longer form part of your estate. Trusts are often taxed at high rates and there are legal and administrative costs to setting up and running a trust that may outweigh the probate savings. However, there are many other financial planning uses for these types of trusts that may still make them a good solution for many individuals.
Open (Non-Registered) Money Invested at a Life Insurance Company
Unique life insurance laws allow direct beneficiaries to be assigned to open (non-registered) investments placed with a life insurance company. This allows the assets to bypass the Will and avoid probate. There are many investment options available at life insurance companies which can make this a great strategy.
These are some of the many methods of reducing or avoiding probate fees. Although reducing the number of assets that flow through your Will can save you probate fees, great care must be used when implementing these strategies to ensure that your intentions are not compromised. This is because when assets skip your Will (and thus, probate), they are not subject to the instructions stated in your Will. For this reason, professional advice is critical to ensuring your goals are achieved.