Passing on your property outside a will

And the response of “In that case I’m not going” is pretty tired – and wishful thinking, at best. We’re all going. It’s just a matter of when.That’s why a fundamental part of the estate planning process is working out what you’re going to leave to whom, and how you are going to convey the property to your heirs.It’s not as simple as you might think. The manner in which your property is passed on can make a significant difference in how long the process takes and what it all will cost.

Of course, the usual way to convey property after death is through a will. But there are other ways to do it, each with its own advantages and potential problems. Let’s briefly look at each of them.

1) Beneficiary designation. This involves naming a specific beneficiary to receive an asset, rather than having it form part of your estate. RRSPs, RRIFs, pensions, and insurance policies are all eligible for this kind of treatment. This reduces the value of your estate for probate fee purposes and enables all such assets to be transferred more quickly. Spouses usually designate each other as named beneficiaries.

This method of conveying property is not avaable in Quebec. Such assets may only be transmitted by a will or a marriage agreement, as beneficiary designation is not in keeping with the recognized form of wills in Quebec. A will, therefor, becomes even more important for someone living in Quebec.

2) Gifts. To most Canadians’ way of thinking, a gift is a pretty straightforward act. Not so, at least as far as the Canadian Customs and Revenue Agency (CCRA) is concerned. Gifts can become pretty complicated due to associated tax issues.

To be a valid gift, several elements are required.

a) The person making the gift, the donor, must have had the intent to do so.

b) The recipient must have accepted the gift.

c) The gift must be irrevocable.

There are several types of gifts, including outright transfer of property, transfers to an irrevocable trust, and creation of joint ownership.

A gift will avoid probate fees, but may create other problems. If the recipient is a spouse or a related minor, any income from the property will be attributed back to you while you are alive, and will be taxed in your hands. If the recipient is anyone other than your spouse, you are deemed to have disposed of the property, and to have received the proceeds from the sale, at the fair market value of the property. This will trigger either a capital gain or a capital loss.

3) Joint tenancy. Because it is so easy to accomplish, transferring property into joint names may seem to be a simple solution to passing along assets outside a will. But beware. Easy does not mean without potential pitfalls.

There may well be tax consequences to this action. These could be greater than the saving you hope to realize by reducing probate fees. Make sure you have full professional advice before taking any such actions.

You must fully trust the person with whom you are sharing ownership of the property. Consider that property transferred into joint tenancy will be subject to any claims that creditors may have against the other joint tenant. You may have great difficulty in regaining control of the asset. If the asset is a tangible one, such as a house, will the other person care for it as you would? Will financial assets be managed to your satisfaction? You may be considering doing this with a child you love dearly but be careful because the relationship could be soured.

This course of action really assumes you will be the first to die. If you don’t predecease the other person, then you won’t have accomplished anything by doing it.

Here again, this method of conveying property is not available to those domiciled in Quebec. Quebec civil law does not generally recognize the common law principle of ownership of property passing through joint tenancy. Such assets may only be transmitted by a will or a marriage agreement.

4) Trusts. Finally, trusts can present great planning opportunities, but their costs and limitations, especially the tax consequences of their use, need to be well understood. We’ll deal with them in depth in a future article.

In sum, there are several ways of passing on property to others outside a will, but they’re not without pitfalls. You need to give careful consideration to any of these options and get some professional advice before going ahead.