One of the goals many people have in Estate Planning is to minimize taxes and other estate administration costs such as probate fees. The purpose of probating a Will is to establish the authority of the personal representative to deal with the estate assets. Although the authority of Executors (now called “Estate Trustees”) stems from the Will, financial institutions and other third parties sometimes require judicial confirmation that the individual purporting to be the Estate Trustee has proper authority. Where there is a Will, the court is simply verifying that it is valid and is the latest Will. If there is no Will, the court is actually appointing the Estate Trustees and their authority to act stems from the court appointment. Terminology has changed. The court used to issue “Letters Probate” to validate a Will and “Letters of Administration” to appoint an Administrator if there was no Will. The court now issues a “Certificate of Appointment of Estate Trustee with a Will” or if there is no Will, a “Certificate of Appointment of Estate Trustee without a Will”.

When making application for an appointment as Estate Trustee, the Estate must pay probate fees based on a percentage of the value of the assets in the Estate at the date of death. If the assets can be distributed without probating the Will, no probate fees will be payable. Planning to avoid probate fees involves planning to structure ownership of assets in such a way as to avoid the need to probate the will in order to effect distribution of the assets.

Currently, probate fees are .5 percent on the first $50,000.00 of the value of the estate and 1.5 percent on the remaining value.

Assets Subject to Probate Fees

Fees are payable on the full value of the assets that belong to the deceased at the time of death. Jointly held assets pass by right of survivorship to the surviving joint owner on the death of the other joint owner. Therefore, jointly held assets do not form part of the Estate at death and are not subject to probate fees. Life insurance proceeds payable to a named beneficiary are not considered an asset of the Estate. Likewise, if a beneficiary has been designated under an RRSP, RRIF, or pension plan, the proceeds are generally not considered to be an asset of the deceased plan holder’s estate. The Estates Act, which sets out the requirement to pay probate fees, exempts real estate situate outside of Ontario. The only liabilities of a deceased which will reduce the value for the purpose of calculating probate fees are the value of encumbrances against real property. This would include mortgages as well as other types of encumbrances such as construction liens. No other debts or liabilities may be deducted in calculating probate fees.

Is it Necessary to Probate the Will?

Since the Executor or Estate Trustee acquires the authority to deal with Estate assets from the appointment in the Will, it is not mandatory to probate the Will. It only becomes necessary if a third party demands a probated Will before dealing with a request from an Estate Trustee to transfer an asset. For example, it is usually not necessary to probate a Will to transfer shares of private companies. With respect to real estate, if land is registered in the Land Titles System it will be necessary to probate the Will. However, if land is registered under the Registry Act System it can be transferred without probate if a notarial copy of the Will with supporting affidavits are registered. With respect to Canada Savings Bonds, where the beneficiary is entitled to the deceased’s entire estate, probate will not be required provided the value of the bonds does not exceed $20,000.00. If the surviving spouse is entitled to all the deceased’s estate, probate will not be required unless the value of the bonds exceeds $75,000.00. With respect to bank accounts, term deposits and GIC’s, banks vary in their administrative practice but normally do not require probate if the value is in the $5-10,000.00 range.

Planning Points:

(a) Transfer assets to joint ownership - Since jointly held assets do not form part of the Estate of a deceased owner, an obvious planning technique is to place assets in joint ownership. A transfer of beneficial ownership will be a disposition for tax purposes; therefore it is essential to consider the tax implications both of the transfer and then after the transfer with respect to income generated from the assets. A transfer of an asset into joint ownership will trigger a disposition of one half of the property for tax purposes. Because beneficial ownership must be conveyed to the joint owner in order for the technique to work, it will involve giving up control over the assets. A transfer between spouses may not give rise to a concern over control, but transfers to children can be problematic. Consider the transfer of joint interest in a home to a child whose marriage breaks down some years later. The value of the joint interest owned by the child may be exposed to a claim under the Ontario Family Law Act, which automatically severs the joint tenancy held by a married person immediately before that person’s death if it is held with someone other than the spouse. Now the person may share ownership of the home with their child’s spouse and this may not be what was intended. In such cases one might consider having the child bequeath the interest in the property back to the parent if the child predeceases the parent while married. One might also consider requiring the child to whom the joint interest will be conveyed to enter into a marriage contract to protect the joint interest.

If a residence is transferred to joint ownership there should be no tax on a transfer because the principal residence exemption should be available. Where the residence is subject to a mortgage or other encumbrance, there may be land transfer tax to pay. If the real property does not qualify for the principal residence exemption or the property is another type of capital assets and there is an accrued gain, the transfer of a joint interest will trigger a capital gain. If the transfer is between spouses, the capital gain will be deferred unless the spouse elects to trigger it. Canada Savings Bonds, term deposits and similar types of cash assets are ideal for this type of planning technique because a transfer will not trigger a capital gain.

(b) Life Insurance, RRSP’s, RRIF’s and Pension Plans - Where there is life insurance, RRSP’s, RRIF’s or pension plans, it is usually wise to designate a named beneficiary to receive the proceeds on death. This will take the proceeds out of the estate and avoid the payment of probate fees in respect to them. Also, they are not normally subject to the claims of creditors and will usually be paid out much more quickly than if they came through the Estate.