The Role of the Executor
An Introduction to Estate Planning – Part 5
Once you die perhaps the most obvious observation one can make is that you are no longer in charge. The only way to establish some degree of control over what happens to your assets, your estate, is to create a will. A will, as the name makes clear, puts your will – your intentions, wishes, choices, instructions, etc. – in writing in a legally approved manner so that it can be carried out by your executor, the party chosen to “execute” your instructions.
If you are in Ontario, you might see the term estate trustee rather than executor. This terminology makes plain a basic element of the executor’s role, that is, that the executor is a trustee; they receive the estate in trust from the deceased, and administer and then distribute it for the benefit of the beneficiaries. This terminology also makes clear that the executor (estate trustee) has a fiduciary duty, that is, a legal obligation to act in the best interest of the beneficiaries. People may think that it is an honour to be asked to take on the role of executor, and perhaps it is. When you as the testator (the person writing the will) choose someone to act as your executor, you are deeming them to be trustworthy, capable and responsible. But it is also an onerous responsibility and depending on the complexity of the estate may require significant consultation with a lawyer and/or an accountant.
Choosing an Executor
Spouse, Other Close Relative or Friend
This is probably the most common choice we tend to make. A married couple will typically make each other their respective executors. Furthermore, as many assets can be owned jointly, they bypass probate, that is the process of validating a will, and ownership simply passes over to the surviving spouse. Examples of such joint property include a home, bank accounts, and investment accounts. Furthermore, assets that cannot be held jointly, like Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) or Tax-Free Savings Accounts (TFSAs), allow for the naming of a beneficiary, which is typically the surviving spouse. This can streamline the process significantly.
If there is no spouse, then another close relative or perhaps even a friend may be chosen instead. As above, registered accounts may be able to be dealt with quite straightforwardly if the beneficiaries are named in the account documents. Theoretically, you could also make your close relative/friend a joint party on non-registered assets, but that can lead to all kinds of issues. Jason Heath, a financial planner, wrote an article in MoneySense about using joint accounts to avoid probate that points out a number of the potential pitfalls to naming an adult child as a joint party on your various assets. To cite just one example, consider the consequences if your adult child with joint ownership of your home was sued or divorced. The home could be found to be part of the assets that could be claimed in the lawsuit or that would be subject to division in the case of a divorce.
Regardless of whether these strategies are used, in the case of a person who is not married at the time of death, the settling of the estate is potentially more complex. For that reason it may be wise to consider naming a professional in the field of estates to act as a co-executor alongside the appointed relative or friend.
You can arrange to appoint a trust company in your will to manage and distribute your estate. This can be especially beneficial if your estate has the potential to be complex or if the relatives whom you would normally appoint as executors are not resident in your province. Given the proximity of Canada to the US, it is quite possible that the person you would otherwise name as your executor has moved to the US, a fact which could potentially subject your estate to US laws. Trust companies are professionals in the administration of estates and will, of course, charge for their services. Typical charges are in the neighbourhood of five percent of the value of the estate, but depending on the size of the estate could be subject to a minimum for a smaller estate, or negotiated down to a smaller percentage for a larger estate. Ordinarily, you would name the trust company in your will.
Because wills are typically drawn up by lawyers and the probate process involves the courts, a potential alternative, or complement, to a relative is a lawyer.
A major part of acting as an executor is filing final tax returns for the deceased. Depending on the circumstances of your estate, multiple returns may need to be filed. A licensed accountant is therefore potentially a good alternative.
Even if you do not name a lawyer or accountant as your executor or co-executor, it may be in the best interest of the estate’s beneficiaries, and indeed of the executor, to consult with these and other professionals in order to ensure the orderly winding up of your estate. An executor generally has the right to seek professional advice and to charge the cost of that advice to the estate.
Upon your death, the executor you name has the responsibility to take charge of your affairs and distribute the assets according to the terms of your will. Among other things, that includes determining the assets and liabilities of the estate. Liabilities, for example, outstanding bills, need to be paid.
Apply for Probate
This application is the process whereby the court grants approval for the executor to take over your property, manage it and distribute it to your beneficiaries according to your will. Probate fees vary by province. British Columbia, where I was born and raised, and Ontario, where I have been living for nearly 20 years now, are among the most expensive jurisdictions. Quebec charges a flat court processing fee. On July 1, Manitoba will eliminate probate fees.
As an example of British Columbia’s and Ontario’s fees, see the following table:
Notify Government Agencies
If you were old enough to receive Canada Pension Plan (CPP) or Old Age Security (OAS), your executor should contact Service Canada to cancel those benefits and determine the death benefits due to a surviving spouse or the estate.
Depending on the circumstances, your executor may need to file more than one tax return. This includes a “terminal return” to report your income up to the date of death. Although the regular T1 form is used, there are some exceptions available. Among them are:
- Charitable donations can be carried back to the year prior to death, within certain limits, or if the donations are not of use in the terminal return can also be claimed by the estate;
- Medical expenses can be pooled together for any 24-month period including the day of death, rather than the 12-month period;
- The full amount of your RRSP or RRIF is brought into income in the year of your death unless the beneficiary is your spouse or certain dependants;
- Capital losses, which are normally only allowed to be claimed to reduce capital gains, may be deducted from other income;
- Income earned after death is subject to tax as part of the estate.
You may often hear about an inheritance tax. This is a US tax, which Canada does not have. If you have cash in the bank and leave it your family, there will be no tax to pay at all. However, you may very well have capital assets, like stocks or real estate. The rule here is that these capital assets are deemed to be sold immediately before death at their fair market value. This means that any capital gains will be realized according to the usual rules, which is currently that 50 percent of the realized gain is taxable, in addition to any other exemptions.
Identifying beneficiaries may seem obvious and easy to accomplish. However, sometimes a will may describe a category of beneficiaries, such as “any children of mine,” rather than naming them each individually. This situation can also result from you not having created a valid will, that is, dying intestate. Although you won’t have named an executor, a family member of yours may petition the court to become the executor and then it will fall to them to identify the beneficiaries according to the law. Regardless of the circumstances, the executor needs to identify all the beneficiaries and locate them. If a beneficiary cannot be found despite all reasonable efforts being made, the executor may have no other choice but to request that the court declare the missing beneficiary dead or “absent” so that the estate can continue to be administered.
Divide Property According to the Will or the Law
Again, this seems straightforward and it often is. But sometimes things are not always as one might think. For example, some assets may have value to you, but they may be of no consequence to any of the beneficiaries. This is a relatively minor issue, however. A more important matter may be restrictions on your testamentary freedom when you make a will. Two exceptions well established in law are that:
- You may not leave a family member out of your will if that person was financially dependent on you at the time of your death; and
- You must provide for your spouse according to the minimum required in your province of residence at the time of death. The death of a spouse is considered a breakdown of the marriage and triggers matrimonial property legislation.
You may have heard of a case from 2019. A BC judge overturned a will that left the majority of the estate to the testator’s sons, with very little left to the daughters. According to the will, the four daughters received $150,000 each, while the two sons received $4.2 million each. While this law allowing the overturning of a will only applies in BC, it is still wise to consider an equitable distribution of assets to your heirs. You do not want your lasting legacy to be bitter feelings among your children.
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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, accounting or legal decisions.