Reduce your estate for probate

Many Canadians fail to realize that death can trigger significant costs that, without proper planning, could dramatically erode the value of their estate. With proper planning, it may be possible to maximize the value of an estate by ‘reducing’ its value for probate purposes. But first ensure any action does not give rise to adverse income tax consequences; and furthermore, that the cost of planning, implementation and administration does not exceed the probate fee savings you’re looking for.

Beneficiary designations

Financial institutions may not be required by law to have executors take out Letters Probate if there’s a named beneficiary to the instrument — RRSPs, RRIFs, GICs issued by life insurance companies and life insurance policies — or the annuity. In most cases, it’s possible to change a beneficiary designation at a later date, allowing for some flexibility in the ongoing estate planning process.

Gifting assets

Before death occurs, it may be worthwhile to consider gifting certain assets. This is more likely to be an attractive option for the elderly with the kind of assets which might be transferred, ranging from cash to busess or investment assets. Anyone considering this option should give special attention to the tax consequences of gifting to family or others.

Joint ownership

If property is held with another person in joint ownership with right of survivorship, it will pass to the survivor by operation of law and not through the will. This avoids probate on jointly held property. But transferring assets into joint ownership is not legally effective in having assets excluded from your ‘probateable’ estate if the co-owner is a mere nominee (in name only). To avoid probate, you must ensure the asset is held jointly with “right of survivorship” or that you have clearly gifted an interest in the property to the co-owner (usually with a deed of gift). Registering assets is so easy to do that some parents choose this option with their children, without appropriate forethought. Problems can occur if children withdraw funds or sell assets prematurely. Difficulties or suspicions can also arise between siblings, particularly when only one child is given joint ownership with right of survivorship. Legal problems may occur if a child co-owner develops marital problems. Before acting on this option, be sure you understand the ramifications, the least of which is who controls the assets. Also, all tax consequences should be carefully analyzed, including the impact of the attribution rules.

Conversion of personal debt into corporate debt

Personal debts cannot be deducted when determining the probateable estate, with the exception of mortgages on personally-held real estate. It may be desirable to move assets which have debt attached to them to a corporation so an appropriate deduction can be realized. The asset that would fall into the estate for probate purposes would then be the shares of the company, not the actual asset. When calculating the value of the company shares, all debts in the corporation are taken into account.

Private holding company

If the estate is reasonably large, it may be worthwhile transferring assets to a holding company, established in a province with low probate fees, such as Alberta. Multiple wills would be required, with a separate will to deal with assets in Alberta.

Multiple wills

In the simplest instance, a separate will could be drafted to dispose of assets for which probate was not required and a second general will could be designed for all other assets (excluding the assets referred to in the first will). Consequently, probate fees should only be payable on the assets administered through the general will. Check with your lawyer if you’d like to explore this option.

Transfers to a trust

By transferring assets to a trust, you’re in effect reducing your estate, and consequently reducing assets which would otherwise be subject to probate fees. It’s important to note that the transfer of assets into a trust doesn’t always constitute loss of control of those assets. The individual can become one of the “trustees” and make the trust “revocable” at any time. Care must be given to avoid adverse income tax consequences, particularly if the asset to be transferred is an appreciated asset.

A trust in the will

To avoid a second probate on the assets for a second-to-die spouse, you could establish a trust in your will rather than leave your assets outright to your spouse. On the second death, the trust assets would be distributed to the ultimate beneficiaries without the necessity of a second probate. Again, all legal and tax consequences should be carefully analyzed.

Use of insurance

Some insurance products offer effective alternatives to minimize probate fees. GICs issued by insurance companies — which are, in fact, annuities — are eligible to be paid out directly to beneficiaries and therefore bypass the probate process. Another option for mature individuals is to purchase an “insured annuity” versus a GIC for retirement income. When the proceeds are paid out at death, they are insurance proceeds and are not subject to probate if paid to a designated beneficiary. Also, whenever there are capital needs at death (for probate fees, debt and so-on), a life insurance solution should be a key estate planning consideration.

Probate fees on the rise?

People across the country are paying particular attention to probate fees after the Province of Ontario tripled these fees. For married couples, probate fees are a double-edged sword: They’re payable after the first death and possibly payable again on the same or remaining assets of the second-to-die spouse. While no-one wants to spend too much time thinking about death, your assets and your heirs will benefit if you take the time to put a sound estate plan into place before you die.