Probate
Probate is the process by which the Ontario Court certifies that a will is indeed the last will & was duly proved and registered in the Court and that the administration of the property of the testator was duly committed to the estate trustees. It determined who gets the property.The Court’s granting of probate offers real protection to both estate trustees who administer an estate and third parties dealing with estate trustees. For example, if it turns out that a probated will is not, in fact, the last valid will of the deceased, all acts completed under the authority of the probate, nevertheless, will be treated as valid.
2. How Probate Taxes are Calculated
As part of the probate application process, an estate administration tax must be paid. Probate taxes are calculated on the fair market value of all property owned at the time of death (not including insurance payable to a named beneficiary or assigned for value, property held jointly or passing by survivorship, or real estate outside Ontario). The only debts that are deducted in the calculation of fair market value are those secured by mortgages registered against title to real property. In Ontario, the rates of probate are 0.50% on the first $50,000 of an estate’s fair market value and 1.50% on the estate’s fair market value over $50,000.While the savings in probate fees from probate fee planning are not enormous, they are not insignificant. If a $1 million asset is excluded from probate, the saving is $15,000.
3. Ways of Minimizing Probate Taxes
Often, the desire to minimize probate fees becomes an over-riding objective in the estate-planning process. This approach can be a concern, in circumstances where all relevant factors are not identified, considered and balanced against one another. Some common techniques for minimizing probate taxes are set out below.
1)Gifts: Gifts made during one's lifetime are not part of one's estate for probate purposes. This includes both outright gifts and gifts made by transfer to trusts established in one's lifetime.A gift may be made even on one's deathbed and it will be legally effective, even if it is made on the understanding that if one recovers, the gifted property will be returned. Such a gift also escapes probate fees.
2)Joint Ownership:-Joint ownership of property is a traditional way of avoiding probate taxes on such property. If property is jointly owned, its entire title passes on the death of one joint owner by right of survivorship to the surviving joint owner, provided that the property was intended to be jointly owned (and that the joint ownership was not merely for power of attorney purposes, for example). Property that transfers in this way does not fall into the estate of the deceased person, and probate fees are, therefore, avoided.
Note that joint ownership of property should be approached cautiously. For example, a marriage breakdown may occur in the future on the part of one or both of the joint owners. In addition, there may be a risk of misappropriation of funds, where an elderly parent contemplates joint ownership with an untrustworthy adult child, for example. A loss of a principal residence designation for income tax purposes may unintentionally result. In any event, joint ownership will bring about some loss of control over the asset, that may not be desirable. Depending upon the circumstances, the uncertain risks of joint ownership may outweigh any benefit of avoiding quantifiable probate fees.Transferring property into the joint names of yourself and your spouse presents no tax problems. However, transferring it into the names of yourself and your child, or anyone else other than your spouse, can create a tax liability if the property has increased in value, since it is treated as a taxable disposition of a half-interest in the property.
Marketable securities, government or corporate bonds and bank accounts will not be transferred after the death of the registered owner without producing letters probate or letters of administration, except for assets of minor value. This assures the financial institution that the individual has died, that they are getting his last will, not subsequently amended, and that the people who are requesting transfer are properly entitled to do so. However, probate will not be required by a family-held company, where the directors will know that the will is proper, even without probate.
3)Naming a Beneficiary: It seems to be the case that if a beneficiary designation for life insurance, an RRSP, an RRIF or a pension plan is made in one's will, it will be treated as part of the estate for probate fee purposes. A separate beneficiary designation, outiside the will, which is made for a life insurance policy, however, is clearly not part of the estate and the death benefit under the policy is not subject to probate fees. In most cases, these funds are paid fairly quickly following death. Provided that the designated beneficiary is not the estate, probate fees will be avoided.If a separate beneficiary designation, outside the will, is made for a life insurance policy in favour of a charity, the death benefit will NOT be treated as a charitable donation in the year of death. To avoid this situation, such a beneficiary designation should always be handled by naming the estate as the beneficiary of the policy and providing in the will that the policy proceeds are to be paid to the charity. (However, this does not apply to life insurance policies which are owned by, and payable to, a charity.)
4)Transfer Assets to a Trust :In general a trust can be set up during your lifetime (inter vivos trust) or upon your death (testamentary trust). It can be created by yourself either verbally or in writing, by statute or by the court. With a trust a settlor asks a trustee to hold certain property in trust for a beneficiary. There are many types of trusts to suit different circumstances including family trusts, alter ego trusts, Henson trust (for a child with a disability), life insurance trusts, etc. It is important that if trusts are set up that they are fully integrated with a proper estate plan.
Spousal Trusts or Trusts for the Children:
A transfer to a trust for the exclusive benefit of one's spouse during the spouse's lifetime will not be subject to tax, even if the property transferred is worth more than its cost. Therefore, one method of avoiding probate for appreciated property is to transfer it to such a trust. The income and gains from the transferred property, or any property substituted for it, will continue to be taxed as the transferor's income and gains.
Living (Inter- vivos ) Trusts:
It is common for a person to avoid the expense of probate by transferring his major assets into a revocable inter vivos trust (sometimes called a living trust), under which he retains the right to the whole of the trust income and he can require the trustee to return to him at any time any part of the capital he wishes. The trust also provides that upon his death the remaining capital will be distributed in much the same way as under a will. Because this is not a will, the property in the trust at his death is not part of his estate for probate purposes and no probate fees are payable on this property.
However, the transfer to such a trust is probably regarded by Revenue Canada as a disposition for tax purposes. This means that if the property transferred is worth more at the time of transfer than its cost, the difference will be treated as a capital gain for tax purposes, 75% of which will be included in income.
The information provided here is for educational purposes only.Please consult Lawyers who specialize in Trust & Probate issues and are knowledgeable in provincial and federal laws.
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