I suspected that the title would get your attention, as it should have! I’m writing this article because a client of mine recently dealt with a financial planner that did not consider the consequences of their actions and focused almost exclusively on saving probate fees. I would not want you to make the same mistake.
In my over 40 years practicing law one of the most common questions I still frequently receive is how do I avoid paying probate fees? Though the term “probate fees” is commonly used, they are properly referred to in Ontario as Estate Administration Tax (or EAT).
Establishing an estate plan and seeking professional advice is always advisable. My aim in writing this article is to warn about the dangers of planning an estate with the sole purpose of avoiding the payment of EAT. I will also explain why financial planning should not be conducted in a vacuum.
What is EAT?
The method by which this tax is levied differs between provinces, however in Ontario EAT is levied as 0.5% on the first $50,000.00 [or $250.00] and 1.5% on any remaining balance. An estate, of course, is comprised of the assets owned by the deceased at the time of their death – the key word here is “OWNED”.
EAT is only payable upon the submission of a probate application (properly referred to as an Application for Certificate of Appointment of Estate Trustee With(out) a Will) to the Ontario Superior Court. If no Application for probate is required, no probate fees are payable. The nature of the assets determines whether probate is required.
Real Property (or “Real Estate”)
The need to obtain probate is a near certainty wherein land is owned by the deceased in their name alone. Where land is owned jointly and no other assets exist, probate is not required. However, it is important to note the differences between real property jointly owned between spouses and real property jointly owned between non-spouses.
Joint ownership of real property is common between spouses. It is generally understood that both spouses hold the land for the benefit of the other. After the death of one spouse, the other is known as the survivor. If the deceased held property jointly with anyone other than a spouse, depending on the circumstances, probate and therefore the payment of EAT is likely required.
It is often the case that the deceased owned a bank account in their name alone. Depending on the value of the account, probate may be required by the financial institution. In this case, any real property owned by the deceased jointly with a non-spouse is generally included in the probate valuation. However, where all assets are owned jointly, even with a non-spouse, probate is normally not necessary.
Joint Bank Accounts
The case law is clear – where the deceased and a non-spouse are owners of a joint bank account and in the absence of strong evidence to the contrary, the deceased is presumed to be the owner. The Government of Ontario regards this account as owned by the deceased for the purposes of probate and EAT. The bank, interestingly enough, often gives the survivor the money in the joint account taking the position that the survivor is the lawful owner. This may or may not be the case, nevertheless, this account still comprises part of the estate on which EAT must be paid.
As you can see, this might create problems between beneficiaries. Where there are problems, therein lies the potential for litigation.
Insurance Policies, RRSPs, TFSAs, and other beneficiary designations
One may name beneficiaries who will receive the proceeds of insurance policies, RRSPs, and TFSAs and similar financial products. They do not comprise any part of your estate. Any probate fee valuation, therefore, will not include the value of these financial products. Without a named beneficiary, or where that beneficiary has predeceased without a substitute beneficiary, the financial product does form part of the estate on which EAT must be paid.
Imagine that you purchase an insurance product and name three beneficiaries. Imagine also that you either fail to name any substitute beneficiaries OR are not permitted to by the company. If you are predeceased by one of your beneficiaries, they and their estate lose any benefit. Therefore, if you wanted the deceased’s children to receive a benefit, this would not occur. Be sure to ask your advisor what would happen if a beneficiary predeceases you!
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On the other hand, in a well-prepared Last Will and Testament, it is common to name substitute beneficiaries to replace a deceased beneficiary. This will ensure that if one beneficiary dies, the substitute beneficiaries can take the share of the predeceased beneficiary. This may not be the case with insurance products; be very cautious in naming beneficiaries and try to name alternate beneficiaries for any deceased beneficiary.
In the case of an RRSP where a beneficiary is named, the value of the RRSP does not form part of the estate and no probate tax is paid on this amount. The proceeds go directly to the beneficiary. YES, you have avoided paying EAT on the RRSP, BUT your estate must generally pay income tax on the proceeds. This reduces the amount remaining to go to your named beneficiaries in the Will. If one of the beneficiaries in the RRSP with children of their own predeceases you, the same problem arises as described above. This situation would be different in the case of a spouse being named a beneficiary of an RRSP.
Avoiding probate fees is not always the best way to achieve your estate planning goals.
Financial Planners
As with all professionals, the quality of advice varies between individuals and to whom they owe their allegiance. Many do not bother to ask what the client would like to accomplish for themselves and their beneficiaries. Instead, they simply look at the narrow financial picture in terms of avoiding probate. I have found that some financial planners, including those employed by banks, still recommend holding assets jointly specifically to avoid probate – WITHOUT taking into account the client’s estate plan. In the absence of communication with other professionals (accountants, lawyers, insurance brokers, etc.), it is possible that they are doing their client a disservice and possibly negatively affecting the estate plan.
What Should I Do?
Ask yourself what it is you’d like to accomplish and who you’d like to benefit. Only then can you decide how to make these goals happen in the most tax and financially efficient method. This cannot be done in a vacuum. Possibly, the payment of probate fees is the only way to be sure that your estate plan is effective.
There is no substitute for professional advice. If your financial planner is formulating an estate plan, it is important that they do not focus on only one aspect – that of saving probate fees. Many simply allow the financial tail to wag the dog. If you have an up-to-date Will, you should provide it to your financial planner to ensure that the financial plan and the estate plan do not conflict. You should determine whether your Will might be defeated by a one-sided perspective. Being “penny wise and pound foolish” is foolish, indeed!
If you do not have a Will or haven’t yet reviewed your Will and compared it with your financial plan, I strongly advise you to do so.
Every situation is different. The facts of every case are unique. This article comprises my own general comments and observations from decades of practicing law and are not intended to be legal advice. Consult your lawyer in the event you wish to prepare an effective estate plan. Additionally, you should actively involve your financial planner, accountant, and insurance broker as well to avoid contradictions and future problems of the sort I have outlined.
For more information on this and many other topics related to effective estate planning, do not hesitate to give me a call directly.
