Probate fees - a hidden death tax
Country Routes January 1997
By Brian Quinlan
This is the first of a three part series by an associate of mine, Brian Quinlan, who is an accountant specializing in estate matters. He has written some articles for various publications including one for the Financial Post magazine in January of this year titled, "Ten Ways To Beat The Taxman". He has given me permission to reprint them here in my monthly column along with the Canadian Moneysaver Magazine where they appeared earlier in the 1990's. I plan to be working with him more closely in the future in matters primarily concerned with Estate Planning. He is well versed in all matters pertaining to this area and I feel confident that his expertise is what I was looking for to help me deal in areas beyond my own expertise. His firm, Quinlan Quinlan, is located at 8 King Street in Toronto. Quinlan merged with Lawless in October 1996 under the Campbell Lawless banner.
Probate is used to describe the process of going to court to prove a will's validity and confirming the appointment of the executor(s). Ontario charges a fee for issuing Letters of Probate.
Probate planning
"Probate planning" has become a hot topic in the Ontario estate planning community. This has been caused by the dramatic increase in Ontario probate fees announced this year. Fees for estates valued up to $50,000 were not impacted by the change. The fee remains at $5 per $1,000 of estate value or, for the mathematically inclined, 1/2 of 1% of the estate's value. However, fees for the portion of an estate in excess of $50,000 are now $15 per $1,000 (1.5%). A $500,000 estate would now incur probate fees of $7,000. Previously, fees would have been $2,500. The new fee structure is one reason to take steps to minimize the exposure to probate fees. Furthermore, the probate process often ignores debt. Probate fees are usually based on the gross value (not net value) of an estate. Probate, unlike income taxes on death, cannot be avoided by passing on assets to a spouse. Probate fees are not income tax deductible.
Reducing the value of an estate
Probate fees can be minimized by reducing the value of an estate for probate purposes prior to death. This can be accomplished in a number of ways.
Hold assets in joint ownership
On the death of an owner the surviving owner takes full title while the deceased owner's interest "disappears". The asset does not form a part of the deceased owner's estate subject to probate. In terms of life expectancy, it is preferable to have children as joint owners rather than a spouse (subject to your estate planning objectives). Gift real estate assets and maintain a life interest. On death, the life interest will disappear and again, does not form part of the estate for probate purposes. The life interest permits you to enjoy the use of property until death without ownership.
Transfer assets to a trust
Assets in a trust are not considered to be owned by an individual. Therefore, they would not form part of an estate for probate purposes. An advantage of a trust is that control, or enjoyment, of the assets does not have to be given up. However, a capital gain (and perhaps, taxes on such) can be realized when assets are transferred to a trust.
Passing assets to beneficiaries directly
This process enables assets to be passed outside of the will and outside of probate. Assets pass to heirs as a result of them being stated as the specific beneficiary. Such assets would not be passed under the terms of a will. This can save the executors time and headaches as well as minimizing probate fees. Investment vehicles sold by insurance companies (GICs, annuities, RRSPs, etc.) require a named beneficiary. On death these assets do not form part of an estate for probate purposes. (Insurance company investment vehicles, in many cases, also permit protection from creditors.) Some banks and trust companies will pay out RRSPs without requiring letters of probate.
Incorporate financed assets
As mentioned, probate fees are usually based on the gross value of an estate -- debt is ignored. If an individual had a $500,000 portfolio of investments which is financed by a $500,000 outstanding loan, probate would be based on the gross value of $500,000 despite the net value of the portfolio being nil. Here, it may be desirable to transfer the stock portfolio and debt to a holding company that would be owned by the individual. On death, it would be the value of the holding company shares that would be included in the estate for probate. In this example, the value of those shares would be nil. It is not necessary to transfer mortgaged real estate to a holding corporation to minimize probate. The valuation for probate purposes of real estate would take note of outstanding mortgages.
Appoint a power of attorney
A power of attorney, a document permitting another to care for your affairs should you become incapacitatd, can assist in minimizing probate costs. For example, a power of attorney can enable gifts to be made on an individual's behalf prior to an individual's death. Effectively, the gifted asset passes outside the will and outside probate. The estate value would decrease to the extent of the value of these gifts. As you would expect, there are specific requirements to be met in order for the gift to qualify as such.
Caveats
If you take steps to minimize probate fees it is vital that related income tax, and family and estate law issues are considered. Paying higher probate fees, in many cases, will be preferable to the income tax and family law exposures. However, there are ways in which both income taxes and probate fees can be reduced. Probate planning, like any form of financial planning, must be undertaken with objectives and goals in mind. It does not make sense to implement steps to minimize probate fees if your assets do not end up where you want them to.
No escape
There is no escape from the fees! If you die without a will the estate will still face fees. (Not to mention the increased legwork for the executors.) Ontario will charge for issuing Letters of Administration. The fees for this are the same as with probate.
No probate required
With estates having minimal value, probate may not be required. An estate lawyer should always be contacted.
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