There is a famous quote by Benjamin Franklin that nothing in life “can be said to be certain, except for Death and Taxes.” Although death is inevitable, certain strategies may be undertaken to minimize taxes and ensure that as much of your estate goes to your intended beneficiaries as possible. Today, we will consider Probate Fees, which are a type of Tax (or Fee) levied provincially on assets owned at death.
What is Probate?
When it comes to handling the assets within your estate, probate has a couple of meanings. “To probate” is the process by which a Will is authenticated and the Executor(s) named in your Will is confirmed under the provincial court of law.
After the Will has been probated, the Executor(s) has the legal authority to administer your assets as per the instructions in your Will. If you do not leave a Will, the probate process is combined with a more complicated court process to appoint an Executor to settle your estate. Provincial legislation will then dictate how to distribute your assets (which may be inconsistent with your actual estate intentions – this is one of the key reasons it is important to have a Will).
“Probate Fees” are the levies/taxes paid from your estate to the Ministry of Finance. Specifically, for Ontario individuals, the Estate Administration Tax (Ontario) (“EAT”) (formerly known as “Probate Fees”) is the tax charged on a deceased’s estate’s total value.
These Probate Fees are separate, and in addition, to income taxes which may be payable when an individual dies under the “Deemed Disposition” income tax rules which apply at death.
Probate Fees are calculated based on the total value of all assets you own individually (with a few exceptions) at the time of death. Once the courts probate your estate, the Executor(s) can distribute the estate’s assets as per the terms of your Will.
Which Assets are Subject to Probate?
The estate consists of all assets owned by the deceased at the time of death, including:
● Bank accounts;
● Investments;
● Real estate;
● Cars;
● Jewelry;
● Business Interests
How are Probate Fees Calculated?
The probate process and its subsequent fees vary depending on the province where you live and hold assets.
In Ontario, as of January 1, 2020, Probate Fees have been eliminated on the first $50,000 of the estate’s value. For estate values in excess of $50,000, Probate Fees apply at 1.5% on the estate’s value. For example, the current probate Fees on a $1M estate would be $14,250.
The Probate Fees on a $10M estate would be $149,250.
How can I Minimize my Probate Fees?
Probate Fees can be minimized through proactive planning to ensure that more of your wealth goes to those you love.
Firstly, it is important to name a beneficiary (other than your estate) on RRSPs, RRIFs, TFSAs, and insurance policies to ensure that these assets transfer “outside” of your estate to your named beneficiaries, thereby avoiding Probate.
Joint Ownership With Rights of Survivorship with a spouse on bank accounts and property is also an effective way to keep these assets outside of the probate process and in the hands of your spouse.
You could gift assets to family members while you are alive, but unless the assets have no accrued gain (like cash), a capital gains tax liability may be triggered on the transfer. Moreover, when gifting assets, it is important to remember that you will lose control after the asset has been transferred, and you do not want to gift anything away that you may need later on in life.
Lastly, the use of Multiple Wills (e.g., if you hold private company shares), nominee corporations for real estate, and setting up certain types of trusts (e.g., Alter Ego / Joint Partner Trusts) while you are alive may be other options to help minimize the assets held in your estate upon death and thus minimize your Probate Fee liability.
What are some of the Common Tips and Traps with Probate Planning?
When considering Probate Planning options, it is important to ensure that the strategy is aligned with your overall estate intentions and does not result in unintended consequences.
It is not uncommon for individuals (who may not seek out professional advice and are Do-It-Yourself planners) to attempt to “bypass” the 1.5% Probate Fee at death but inadvertently trigger an immediate ~27% capital gains tax bill.
Individuals have transferred assets into “joint accounts” with adult children intending to avoid probate in other situations. Unfortunately, the use of joint accounts (with adult children) can be fraught with potential challenges. Specifically, in the absence of clear documentation, the question may arise after the transferor’s death as to what was the “true intention” of the transferor in putting the account into a joint name with someone else? Did the transferor intend to make a gift of the property, or was it done for other reasons, such as avoiding probate or ease of managing the asset? Such situations can lead to significant family conflict and expensive estate litigation.
In summary, with any Probate Planning, it is crucial to “not let the (probate) tax dog wag the planning tail”.
The information contained herein has been provided for information purposes only. The information does not provide financial, legal, tax or investment advice. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Korenblum Wealth Inc. (“KWI”) does not guarantee the accuracy or completeness of the information contained herein, nor does KWI assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Clients should obtain independent tax and legal advice before implementing any of the suggestions contained herein.
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