My son, Win, thought he would educate me on some facts about human mortality this week. He shared with me that spontaneous human combustion is most likely to happen during periods of strong magnetic disturbance. Supposedly, it's possible for a person to seemingly ignite without any external fuel, and that most victims that have been discovered were wearing slippers at the time (it then occurred to me that the kids haven't spoken to Grandpa in a while).
I have no idea whether Win's information is accurate, but I did start thinking about my own mortality. I put away my slippers, and started contemplating the taxes that might arise at the time of my death. Specifically, I was thinking about one particular tax that many people overlook: Probate fees.
At the time of your death there is generally a requirement that your last will and testament be legally approved by the courts under the laws of your province or territory. The probate process also confirms the appointment of your executor, and each province specifies what documentation is required as part of the probate process.
Not all wills have to go through the probate process (this will depend on the nature of the assets, among other things), but as a practical matter, most estates end up going through this process, and until this process is complete, it may not be possible for the executor to manage or distribute the assets of the estate.
Most provinces charge a fee for probating a deceased's will - and make no mistake, this is a type of tax. The fees can be as high as approximately 1.5 per cent in Ontario, to no fees in Quebec (for notarial wills).
There are a number of ways to minimize probate fees. Let me say, first, that it may not always make sense to make significant efforts to avoid probate fees. It's a cost-benefit question. Take the time to understand what your probates would look like if you died tomorrow, and then determine whether any of the following ideas might make sense for you. Consider these strategies:
1. Designate beneficiaries
You'll avoid probate fees on your registered retirement savings plan (RRSP) and registered retirement income fund (RRIF) assets if you designate beneficiaries under those plans. Likewise, the death benefits of any insurance policies on your life will sidestep probate fees if you name beneficiaries under those policies. By designating beneficiaries (other than your estate), these assets fall outside of your estate and pass directly to the named beneficiaries.
2. Joint ownership
If you hold certain assets jointly, with right of survivorship, those assets will pass outside of your estate directly to the other joint owner(s) at the time of your death and probate fees will be avoided. Beware: There can be drawbacks to joint ownership, which I will address next week. Make sure you've considered the pros and cons first.
3. Giving it away today
If you don't own an asset at the time of your death, then your estate is reduced in value, and the level of probate fees owing at the time of your death will also be reduced. Keep in mind that you shouldn't make gifts for the sole purpose of avoiding probate fees. Make sure it fits with your overall intentions to help your heirs today and doesn't hurt your ability to provide for yourself going forward. Also, giving away assets that have appreciated in value could give rise to a taxable capital gain - so understand this cost first.
4. Establish multiple wills
Based on a 1998 Ontario court decision - the Granovsky case - it's possible to establish multiple wills in Ontario: One for those assets that must go through probate and one for any non-probatable assets. Most commonly, the shares of a privately held company can avoid probate and can be dealt with in a separate will. At the time of your death, only the will dealing with the probatable assets will be submitted for probate. It's critical that the wills be drafted properly so that one doesn't revoke the other. Speak to a lawyer in your province - this strategy may be utilized in a number of provinces.
5. Establish trusts
If assets are held in a trust, they will be dealt with under the terms of the trust rather than as part of your estate when you die, avoiding probate. You might also consider placing assets in a trust for your spouse at the time of your death (a testamentary trust), which can avoid probate a second time when your spouse dies.