Avoiding Probate

David a nd Alice came to my office recently to finalize their estate plan. They made it clear, "we don't want the government to get their hands on any of our money when we die." In Ontario that means probate fees, as the province does not impose estate taxes, death duties or succession fees.

So what is probate and probate fees? Probate is the process by which a court confirms that a will is valid. The process involves fees. In Ontario the fees are $250 for the first $50,000 of your estate and $15 for each additional $1,000 with no upper limit.

Since June of 1992 when Ontario tripled its probate fees, people have been looking for ways to avoid paying them. And no wonder - this quiet tax can set you back almost $15,000 on a $1 million estate. In many cases, probate fees can be avoided altogether by ensuring that certain steps are taken. In other cases, the fees can be substantially reduced with some advanced planning and implementation. Here are some tips I passed on to David and Alice about cutting their probate costs, with some precautionary advice thrown in:

Register their assets as jointly held

By doing so, the assets will pass on directly to a beneficiary when they die without attracting a hefty probate fee. Note that for this strategy to operate, joint ownership must be in the form of joint tenancy, which has the right of survivorship, rather than tenancy-in-common, which does not.

However, transferring ownership could have a number of consequences.

It may have adverse tax consequences. While gifting looks innocuous, income tax laws treat gifts the same as sales. Thus, they may be exchanging a future, relatively small probate fee liability for an immediate, relatively large income tax bill.

b) They could lose control of the property. Do not assume that the person who acquires ownership (or shares it with them) will give it back in the future if they change their mind or will agree to the manner in which they later propose to deal with the property (a sale or mortgage of real estate, for example).

c) The other person may have marital problems or financial difficulties that will expose the property to a rick of loss.

2. Name a beneficiary

Ensure that life insurance proceeds payable on death do not form part of their estate. This is most easily accomplished by ensuring that proceeds are payable to a named individual (which can be arranged through the will or directly with the insurer). This may, however, present problems where the beneficiaries are minors or where the insured would prefer that the proceeds be governed by a scheme of distribution outlined in the will. The strategy would also not work if both the insured and the named beneficiary die simultaneously.

Similarly, for RRSPs and RRIFs issued by insurance companies, the plan proceeds will not form part of the insured's estate if the proceeds are payable to a named individual. According to recent Ontario case law, the same does not hold true for RRSPs sold by other financial institutions. Nonetheless, the current view of the Ontario courts is that any RRSP designated is included in the value of the deceased's estate.

3. Prepare multiple wills

The thrust behind this strategy is that only one would deal with the property that requires probate. However, they must ensure that one will doesn't accidentally revoke the other and that the will for probate meets provincial requirements.

4. Gift assets during your lifetime

While the strategy would result in the triggering of capital gains in respect of the transfer of those assets which have appreciated in value, the asset would no longer be owned by them and would therefore not form part of their estate upon death. They should also bear in mind that an outright gift would mean that they would lose complete control of the asset. Consequently, this strategy should be employed only in those situations in which these results have been reviewed.

My final advice to David and Alice: Before worrying about probate, see if it's really a problem. Remember that probate is not required by law, but rather by third parties such as financial institutions who want to make sure the executor has the authority to act. Whether it will be possible to administer their estate without paying probate will depend on the nature and the value of the assets and the person who has current control of them. They must decide therefore whether the costs and consequences outweigh the savings years later at their death.