Avoiding Probate Fees

An estate plan includes two components: the preparation of a will and a strategy to reduce taxes (probate fees and income taxes). The will preparation process cannot occur until you have your estate tax plan prepared as your tax strategies will be ineffective if not included within the body of the will.

 

Who needs an estate plan? ... Everyone! An estate plan is not just for the 55+ generation. Anyone who has accumulated a significant amount of wealth and wishes to ensure that such wealth passes intact to his/her heirs needs an estate plan. Your tax advisor should be asked to prepare your estate tax plan. Your lawyer based on the tax strategies developed will be able to draft a tax-efficient will for you.

 

Probate Fees

This fee is paid to the court to confirm the validity of the will as the "last will and testament" of the deceased and makes it easier for the Executor to process transactions on behalf of the estate. In Ontario, the fee is based on the value of the whole estate including real estate (less encumbrances). On an estate of $500,000 the total probate fees in Ontario will amount to $7,000, calculated at the rate of $5 per $1,000 on the first $50,000 of assets and thereafter at the rate of $15 per $1,000 of estate assets over $50,000. The good news is that the fee is only assessed on assets left to your estate for distribution, i.e., on those assets not passing directly to beneficiaries.

 

Strategies for Avoiding Probate Fees

So how can you reduce or altogether avoid probate fees. Well letís examine some options available to you:

  • Joint Tenancy: Assets held in joint tenancy pass automatically to the surviving tenants, bypassing the estate and avoiding probate fees altogether. Spouses should ensure that all assets, wherever possible, are purchased in joint tenancy. A number of persons have adopted this strategy in their attempt to reduce probate fees and have added an additional person (children, etc.) to their bank account, real estate, mutual funds and other assets. You should be aware that by putting another name on your assets you are in effect triggering a deemed disposition for tax purposes and could be faced with a large capital gains tax bill. Also keep in mind that you no longer have full control over the particular assets and you could be exposing a part of your estate to creditors of the new joint tenant.

  • Designated Beneficiaries: Property with a named beneficiary can pass directly to the beneficiary thus avoiding probate fees. Some of the assets on which a beneficiary can be named include insurance policies, pension plans, RRSPs, RRIFs and segregated investment funds. Wherever possible ensure that your spouse is named as the beneficiary of these assets so that these assets are paid out/rollover to the surviving spouse tax-free. By naming a beneficiary on some of your assets you may have a situation where the estate has a resulting tax liability but there is no money in the estate bank account to pay the taxes. Ensure that you will addresses this potential tax problem.

  • Living Gifts: Consider gifting your assets to your heirs while you are still alive. Since you do not own these assets at death you will avoid probate fees. However, a deemed disposition will occur for tax purposes, which could result in capital gains taxes to be paid. In addition, keep in mind that you will lose control over the specific asset.

  • Inter Vivos Trusts: You can transfer your assets to a trust while you are still alive. Since legal title of the assets pass to the trustee, the assets no longer form part of your estate and would not be subject to probate fees at death. When assets are transferred to a trust a deemed disposition for tax purposes occur.

  • Multiple Wills: Some people are attempting to keep their assets within their estate by using multiple wills to avoid probate fees. One will is prepared for the assets subject to probate and the other will for assets that would not normally require probate. This limited grant of probate seems to be acceptable based on the outcome of a recent court case and the new Ontario Estate Administration Tax Act.

This list is not meant to be exhaustive and as usual you should consult a tax professional and a lawyer before implementing any of the above strategies. In many instances, it may be more cost effective to let your assets remain in your estate and pay the probate fees.

 

                             

© 2001 Blueprint Wealth Management Group.  All rights reserved.
     Updated July 2001