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Maximize your estate by reducing it for probate purposes.

As provincial governments search for new revenue sources, it should be anticipated that some will look at increasing probate fees. People are suddenly paying particular attention since Ontario tripled its probate fees.

Previously, if you had $2,050,000 of assets subject to probate in Ontario the fees would have been $10,250; they would now amount to $30,250. Furthermore, these would be payable at your death, and then possibly payable again on the same assets at the death of your spouse.

Because of these new probate fees in Ontario, people are trying some new and creative approaches to reducing their estates. However, the approaches described below may not be possible in other provinces and readers should be sure to consult lawyers on the practices in their own provinces.

Administrative Fee or Wealth Tax?

Many regard probate fees as a "death tax" on wealth. It is debatable whether a dramatic fee increase such as the one in Ontario is justified, given that administrative procedures of the court remain the same whether an estate is valued at $50,000 or $10,000,000. Much of the paper-work is prepared by law firms and not by government employees. Not only is there no preferred treatment for transfers between spouses, no portion of the probate fees payable is deductible for either federal or provincial income tax purposes. You should also be aware that the calculation of the probateable estate is determined with no deduction permitted for personal debt (other than for mortgages on personally held real estate). In Alberta, probate fees are based on net value of the estate.

Letters Probate May Be Required in Ontario

* When there is no will.

* When executors find it necessary to sue third parties.

* When there is a particular statutory requirement for letters probate on the transfer of particular assets, eg, land registered under the Land Titles Act.

* To meet the requirements of third parties (such as financial institutions) to ensure that they are dealing with the authenticated executors, that there is not another will in existence naming other parties, or that the will submitted to them is not being contested.

The Importance of a Will

To emphasize the importance of having a will, you should understand that an executor named in a will obtains his or her authority from the will itself, and that his or her authority starts with the death of the testator.

Often an estate may be administered without the need for probate. Certainly, where the executors have complete control over the assets, and do not deal with third parties other than the beneficiaries of the estate, letters probate is not required.

Unfortunately, problems arise when just a single asset, even a minor one, requires the executors to take out letters probate. In this case, all of the assets must be set out in the inventory of the estate to determine the level of probate fees. However, with careful planning, some assets can pass outside the estate to reduce probate costs.

In the course of planning, you should first ensure that 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 fees you are looking to avoid.

Beneficiary Designations

(RRSPs, RRIFs, Annuities, GICs issued by life insurance companies, life insurance policies)

Institutions may not be required by law to have executors take out letters probate if there is a named beneficiary to the instrument or annuity. In most cases, it is possible to change a beneficiary designation at a later date, so some flexibility is maintained for ongoing estate planning purposes.

Gifting Assets

Consideration might be given to gifting certain assets prior to death. These range from cash to business or investment assets. This is more likely to be an attractive option for the elderly. Careful attention is needed with respect to the income tax consequences of gifting to family.

Joint Ownership with Right of Survivorship

If property is held with another person in joint ownership with right of survivorship, the property will pass to the survivor by operation of law and not through the will; the jointly held asset never forms part of the first joint owner's estate. This avoids the need for probate on jointly held property.

There may be times when assets are registered in joint names without the intention of passing assets to the surviving joint holder. In this case you would likely specify that there be no right of survivorship. Then the assets would not automatically pass to the survivor and would fall into an estate for probate purposes. Transferring assets into joint ownership is not legally effective in having assets excluded from your probateable estate if the co-owner is in name only. For purposes of avoiding probate, it is important to note that 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.

Often, married couples, or parents and children, individually contribute their own funds to accounts held jointly. Revenue Canada requires taxes to be paid according to "real ownership", i.e. income is to be reported for tax purposes according to the proportion of funds that each contributes.

When you are the sole owner of assets and you "gift" these assets to family members by transferring the assets into joint ownership with right of survivorship, a "deemed disposition" may result and the income tax attribution rules may come into play. The acceptability of any tax consequences will depend on many factors affecting your own personal tax situation. Transferring assets to joint ownership should always be considered within the context of "gifting assets" and should never be done without professional tax and legal advice.

Since registering assets in joint ownership with right of survivorship is so easy to do, many individuals are doing this with their children, without appropriate forethought. Inadequate consideration is given to the problems which may occur later between parent and child, i.e. possible misuse and premature liquidation of assets, difficulties that may arise between siblings, and potential family law problems if a child co-owner develops marital problems. When transferring assets to joint ownership, you must address the issue of who controls the assets.

Conversion of Personal Debt into Corporate Debt

It has already been pointed out that personal debts are not a deduction for the purposes of determining an individual's probateable estate (mortgates on personally-held real estate are an exception; all real estate which is subject to a mortgage is valued on an equity basis for probate purposes). Consequently, it may be desirable to move assets which have debt attached to them to a corporation so that an appropriate deduction can be realized for the debt. The asset that would fall into the estate for probate purposes would then be the shares of the company, not the actual asset. In valuing the shares of the company, all debts in the corporation would be taken into account.

Private Holding Company

A more complicated alternative, most practical if the estate is reasonably large, is to transfer assets to a holding company, in a low probate province such as Alberta. Multiple wills would be required, with a separate will to deal with the Alberta assets. The shares of the holding company would be subject to probate in Alberta. Care is required to ensure that there are no special considerations, such as the possible need for Alberta executors, executor's compensation and financial bonds for executors who are not resident in Alberta.

Multiple Wills for One Jurisdiction

In the simplest instance, a separate will would be drafted to dispose of assets for which probate was not required, and a second general will would be designed for all other assets (especially excluding the assets referred to in the first will). Application for letters probate would only be made with respect to the general will. Probate fees would only be paid on the assets administered through the general will. Legal advice must be obtained in connection with the viability and effectiveness of this type of planning.

Transfers to a Trust

By transferring assets to a trust, you remove those assets from your estate and consequently reduce your assets subject to probate fees. It is possible for an individual to transfer assets to a trust without losing control over those assets. This is accomplished by the individual being one of the trustees, and in addition, by making the provisions of the trust "revocable" at any time by the individual. Revocable trusts have been used in the US for some time. Although one of the purposes of such trusts is to avoid probate fees, other reasons include privacy for families wishing to avoid elaborate and intrusive court supervision of the estate. In the future, the establishment of "anti-probate trusts" may go hand in hand with will planning. Care is also required here to avoid adverse income tax consequences, particularly if the asset transferred to the trust is an appreciated asset.

A Trust in the Will

To avoid a second probate as described in our introduction, you could establish a trust in your will rather than leave your assets outright to your spouse. The trust could provide for all income to be payable to your spouse (or others) and could also allow capital encroachments. On the second death, the trust assets would be distributed to the ultimate beneficiaries without the necessity of a second probate.

Use of Insurance

Some insurance related investments offer a simple and effective alternative for minimizing probate fees. For instance, GICs issued by insurance companies are, in fact, annuities, and thus, are eligible to be paid out directly to designated beneficiaries, bypassing the probate process. Another alternative for older individuals is to purchase an "insured annuity" instead of a GIC for retirement income. This not only offers higher income than a GIC, but when the proceeds are paid out, they are insurance proceeds, not subject to probate if paid to a designated beneficiary.

Life insurance is a reasonably straightforward solution for providing estate liquidity to cover probate fees, as well as investment debt and other debt, and projected tax liabilities at death from the deemed collapse of registered plans or the deemed disposition of other assets at death. Whenever there are capital needs at death, a life insurance solution should be a key estate planning consideration. (A life insurance solution is contingent on the individual being healthy enough to be insurable.)
COPYRIGHT 1996 Legal Resource Centre of Alberta Ltd.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

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Author:Therese Giroux; Howard M. Carr
Date:Oct 1, 1996
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