Canada: How To Shrink Probate Fees On Your Estate In A Few Cost-Effective Moves

How effective is your estate plan? A comprehensive tax and estate plan can reduce – or even eliminate – probate fees that might otherwise be owing upon death.

In many cases, the savings can be significant and can be achieved on a cost-effective basis. The failure to consider probate planning options can undermine even the best estate plan.

Probate is the process by which an individual's will is certified by a provincial court. Where an individual holds assets in his or her own name, a probated will is ordinarily required for the estate trustees to deal with those assets, such as bank and investment accounts and Canadian real estate.

In order to probate a will, the court charges a probate fee based on a percentage of the fair market value of the individual's assets administered under the will (~1.5% in Ontario, or roughly $15,000 for every $1 million of assets). To make matters worse, assets may be subject to probate fees on multiple occasions. For instance, both spouses may be subject to probate fees on the same assets if they own them individually and they pass to the other on first death.

Intuitively, it seems unfair to pay probate fees on assets that do not otherwise require a probated will to effect their transfer, such as shares of privately held family corporations or personal property.

Thankfully, in many jurisdictions (including Ontario, the focus of this article), a number of probate planning opportunities are available to help reduce these fees.

Jointly held assets

One of the most common (and often unintended) forms of probate planning is holding assets jointly with another person. The impact of holding assets jointly is that probate fees are not paid until the death of the last to die of the joint holders, since ownership of the property goes directly to the surviving joint owner by right of survivorship on the first death, outside of any will.

While joint ownership is an effective means of avoiding probate fees on multiple occasions, this form of probate planning does not have the effect of eliminating probate fees in their entirety, and joint ownership of assets brings a variety of other tax and non-tax issues.

The use of multiple wills

Another common form of probate planning in Ontario is the use of multiple wills – one will that deals with those assets for which a probated will is required (often called a "public will") and another will that deals with those assets for which a probated will is not required (often called a "private will"). When multiple wills are used, only the fair market value of those assets that form part of the public will are subject to probate fees.

Probate fees can accordingly be avoided to the extent of the fair market value of those assets forming part of the private will.

Advanced probate planning

Other more advanced probate planning techniques allow assets that would typically form part of the public will (and thus be subject to probate fees) to avoid probate altogether, including "bare trustee corporation planning" (the transfer to a "bare trustee corporation" of legal title to, but not beneficial ownership in, certain assets that might otherwise require a probated will to effect a transfer upon death) and alter-ego or joint partners trusts, where available.

As a result of recent proposed changes by the Canada Revenue Agency to reporting requirements for trusts (including bare trust relationships), the optimal advanced probate planning strategies may have to be reconsidered. Given the significant savings that can be enjoyed with such advanced planning, however, it is almost certain that some form of advanced planning will continue to be used, whether it is bare trustee corporation planning or otherwise.

Example

Mr. and Mrs. Bucket are the owners of an incorporated business (owned solely by Helena, valued at $2,000,000), real estate in Ontario (owned jointly by Bobby and Helena, valued at $2,000,000), and an investment account at a financial institution (owned solely by Bobby, valued at $2,000,000). Let's assume the plan is to leave everything to each other upon the first death.

With only a single will and absent any other planning, probate fees of ~$30,000 will be owing on the first death and probate fees of ~$90,000 will be owing on the second death in Ontario.

With only a single will and a change in ownership of the real estate and investment account to joint ownership, there would be no probate fees on the first death (a probated will wouldn't be required to effect the change of ownership of the corporation if Helena died first), but probate fees of ~$90,000 will be owing on the second death in Ontario.

With multiple wills (but no change to joint ownership), probate fees of ~$30,000 will be owing on the first death and probate fees of ~$60,000 will be owing on the second death in Ontario.

With multiple wills and changes to joint ownership, there would be no probate fees on the first death but probate fees of ~$60,000 on the second death in Ontario.

Finally, with multiple wills and other more advanced probate planning techniques (for instance, "bare trustee corporation planning" or alter ego trusts), probate fees could be avoided in their entirety.

A summary of aggregate probate fees faced by Mr. and Mrs. Bucket in various scenarios:

Conclusion

A comprehensive tax and estate plan can minimize probate fees upon death. The savings can be achieved on a cost-effective basis. Neglecting probate planning options – and tax options in general – can undermine your estate plan.

How advanced probate planning techniques will be implemented in the future remains to be seen as a result of recently proposed amendments by the Canada Revenue Agency to the reporting regime for trusts.

Originally published by Canadian Family Offices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.