Estate Planning: Probating a Will
Probating a will sounds uncomfortable, doesn’t it? Kind of like the legal equivalent of a doctor giving you a thorough physical exam…
Perhaps there is something to that analogy. Although simple, small estates with a single heir may not require probating, the probate process has value and certainly is appropriate in many cases. Probate is the legal process of validating a will and granting approval to the named executor to take over the property of the deceased, manage it appropriately and distribute the assets to the beneficiaries according to the terms of the will. In that legal process, there will be some judicial “probing” going on before the executor can proceed.
In most provinces and territories of Canada, there are fees associated with probating a will. Nobody likes paying fees to the government, but depending on where you live, they are inevitable, although some jurisdictions are more expensive than others. The following gives you an idea of what to expect when it comes to probate across the country:
Let’s imagine that an estate is worth $1 million. I have picked four provinces to show you how the fees would work out differently.
In Alberta, anything about $250,000 is charged a flat rate of $525.
In Newfoundland and Labrador, the first $1,000 or any portion thereof is charged $60. After that, the balance of the estate is charged $0.60 per $100, or if you will, $6 per $1,000. Since the first $1,000 of the $1,000,000 has been charged $60, the remaining $999,000 is charged the $6 per $1,000 fee (0.6%). 999 x 6 = $5,994 for a total of $6,054.
In Nova Scotia, costs escalate considerably. On the first $100,000 the probate fee is $1,002.65. The remaining $900,000 is charged $16.95 per $1,000 or 1.695%, which works out to $15,255 for a total of $16,257.65.
Finally, Saskatchewan charges a straightforward $7 per $1,000 or 0.7%. On $1,000,000 that works out to $7,000.
I don’t know if someone resident in a province like Nova Scotia – or Ontario with $14,250 on $1 million, or BC with $13,800 on $1 million – would be inclined to move to Alberta, Manitoba, Quebec, or one of the territories, where fees are much smaller or non-existent, but there may be added incentives to avoid or minimize probate fees as much as possible.
Minimizing Probate Fees
If you are married or have a common-law partner this is fairly straightforward and makes sense most of the time. If you have a life insurance policy, a pension plan, a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or a tax-free savings account (TFSA), the common-law provinces (i.e., excluding Quebec) allow you to name your spouse as a beneficiary, successor annuitant or successor holder – the terms vary depending on the plan – and the asset bypasses probate and goes directly to your spouse. In the case of a life insurance policy, that also applies to any other named beneficiaries including adult children.
Let’s suppose, however, that your spouse has predeceased you, so you name your children as beneficiaries. All are adults and are not dependent on you. If you have a defined contribution pension plan, the lump sum is taxable in the hands of the beneficiaries.
In the case of an RRSP or a RRIF, the full value of the account is paid to the beneficiaries. Tax is still owed on the balance, however, but the tax is owed by the estate. If the size of the RRSP/RRIF is sufficiently large, the taxes owed may force the executor to liquidate assets within the estate that might have otherwise passed intact to the beneficiaries.
Regardless of the tax implications, though, these steps will reduce probate.
Naming a Joint Tenant
In the case of non-registered assets, naming a beneficiary is not an option. In that case, a common strategy is to name a joint tenant. Again, in cases where there is a spouse, this is fairly common and usually does not cause an issue, especially in the case of home ownership. Likewise for jointly owned bank accounts that, at least these days, generate little to no interest. Investment accounts that are jointly owned also allow for the passing on of the assets to a surviving spouse without being forced to realize any capital gains.
What happens, though, when you are the surviving spouse? You also want to avoid probate, so you name one of your children as a joint tenant (owner) of your house. Here is where things can go very wrong.
Assuming your child is living elsewhere, the house will not be eligible for the principal residence exemption under the child’s name. Capital gains are likely to build up and your child will have to pay tax on it, assuming it is sold after your death. What would have been inherited tax-free is now a taxable asset.
Let’s imagine another scenario. You’ve named your child as a joint owner. Unbeknownst to you, your child has debt problems and shortly after declares bankruptcy. The creditors could go after your house to reduce the amount owing.
And then there are the interpersonal issues between children. For example, if you have three children but name only the eldest daughter as the joint owner, what happens after you are gone and the property is sold? All along you intended that the proceeds from the house sale would be divided evenly among the three kids, but your oldest declares “possession is nine-tenths of the law,” and argues that the house was meant for her alone. You may think that would never happen, but history suggests otherwise.
In most parts of Canada, probate is unavoidable. There are reasonable steps you can take to reduce the financial impact of probate. However, be careful of the unanticipated consequences of seeking to save a relatively small amount of money while leaving yourself or your estate open to much more damaging outcomes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.