Legal: Probate Costs

The main goal of any estate plan is to pass wealth from one generation to the next in the most efficient way possible. That's where a well-considered probate plan comes in - one that not only seeks to limit probate fees, but also sets out the most efficient methods for limiting income taxes as well.

What is probate? Probate is the official term for the process of assessing and verifying a will before distributions are made. The process is performed by the provincial courts to confirm a will's validity, and it can be lengthy. If you're not careful, it can also be quite expensive.

Probate fees can range up to 1.5% depending on the size of the estate and the province. Every province has its own schedule of probate fees, and they can vary widely. If you reside in Ontario, for example, and your estate is worth more than $1 million, your heirs can expect to pay 1.5% of the value of your estate in probate. In British Columbia, that same estate would incur a 1.4% fee.

People often try to avoid probate because it can be a time-consuming and costly process. As well, all documents become public record. The process of identifying all the assets of the deceased, listing them in a prescribed fashion and filing documents with the appropriate government departments can take months to complete. During this time, the executor can't settle the estate and may not be able to make disbursements from it.

Be sure to designate beneficiaries. Registered assets like RRSPs or RRIFs, segregated funds offered by insurance companies, and life insurance policies allow owners to choose a beneficiary who will be entitled to any proceeds upon death. Having a named beneficiary allows these assets to pass directly to that individual without being included in the estate. However, if the RRSP or RRIF beneficiary is someone other than your spouse, your estate will need sufficient funds to pay the income taxes owing on your death.

Make your gifts now. Another simple way of avoiding probate is to give assets to heirs, either directly or through a trust, before you pass away. Obviously, if assets are given to beneficiaries before death, they won't be included in the estate, and won't be subject to probate. In addition to losing some control over those assets though, you could be liable for taxes on unrealized capital gains, so careful planning is definitely a must.

Create an inter-vivos trust. An inter-vivos trust is a trust that you establish during your lifetime. The assets of the trust are managed for the beneficiary by the trustees of the trust. By settling a trust during your lifetime, you no longer own the assets. You may, however, be a trustee and exercise a degree of control over the assets. Once settled, the assets are trust assets held for the benefit of the beneficiaries. Again, no probate.

Joint ownership. If assets are jointly owned with "rights of survivorship," they can pass from one owner to the other without going through probate. The strategy can work exceptionally well between spouses, and in certain cases, between parents and children. Joint ownership is a common way of passing the family home to a spouse or child, for example.

The overzealous use of joint tenancy to avoid probate fees may serve to frustrate other tax planning though, particularly in marital break-ups. Where the property in question is a principal residence, for instance, the exemption will likely be lost for all years the joint tenant doesn't continue to live there. Also, any assets placed in a joint account may be exposed to creditors of either account holder, including ex-spouses.

Tax consequences. The contributors to a joint account are supposed to pay tax on half the assets each person contributes. From then on, interest income, dividends, and capital gains are split evenly between account holders. This is an often-overlooked consequence of joint ownership that may make the strategy more costly than the savings it is likelt to generate.

Above all, don't get carried away in your desire to avoid paying probate fees. Some of the immediate costs such as legal fees may cancel out any other savings. Be sure you have your facts straight before jumping in.

Velma Carroll
Ten Star Financial Services
Burlington, Ontario
905.634.8834

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