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Financial planning tips

September 13, 2016

What is probate?

Probate happens where death and taxes meet. Here’s what you need to know about it – and why – when making your own will or executing someone else’s.

Death and taxes are the only certainties in life, Benjamin Franklin said. But when you mix those two certain topics, you get something many Canadians are very uncertain about: probate.

These 11 points about probate may help you feel more certain:

1. Probate is about approving your will.

Probate is an approval process that validates your will and confirms the appointment of your executor. If you don’t have a will or your executor can’t do the job, the courts have to appoint an administrator — and the costs will be similar to probate. (But every adult should have a will.)

2. Who does what?

Let’s assume we’re talking about your own will.

  • You aren’t required to do anything, because probate is a process that affects your will after your death.

  • Your executor. (This is the person named by you in your will to be responsible for carrying out its terms, making sure your debts are paid, etc.) After your death, your executor must secure the assets of the estate, and will determine whether probate is needed. Even if it’s not a legal requirement, your executor may apply for probate to ensure that he or she can rely on your will as being the final version.

Each province has its own rules and they’re too complex to detail here. But generally speaking, your executor will need to apply to your province’s probate court for approval of your will if you died in debt, with bank accounts or registered investments without a named beneficiary, or if you owned property that isn’t being directly passed to your spouse or common-law partner through joint ownership. It’s a good idea for your executor to start by talking to the family lawyer and searching online for “How do I apply for probate in (province name),” because each province’s rules, approval body, process and costs differ.

  • Your province’s probate court. This is the official body that grants probate approval (sometimes called “letters probate,” but a different name may apply in your province). If there is no will or executor, the court grants “letters of administration.”
3. Without probate, your executor can hit a wall.

Imagine your executor contacts your bank, mutual fund company or pension plan provider, or the land title office with a non-probated will in hand, asking them to hand over your money or register a transfer of property title.

Those institutions will want proof that:

  • you’ve died
  • the will is valid and is the final version
  • your executor is the person named in your will
  • they won’t be sued if the will is contested

Consider this: Why would a bank risk being sued for handing out your money to the wrong person? Instead of taking a risk by assuming your non-probated will is valid, the bank can insist that it won’t release your money until it gets the legal protection that can only come from approval of your will by the provincial probate court. That’s the big upside to probate.

4. Probate fees aren’t income tax.

Probate fees (which in Ontario are called Estate Administration Tax) and income tax are not the same thing. Depending on your province of residence, probate fees can be charged as a flat rate or as a percentage of your assets, not your income. And your estate may need to pay income tax or capital gains tax on assets that don’t even need to go through probate.

5. You can avoid doubling your probate costs.

If you want to leave your entire estate to your spouse or common-law partner, it’s smart to insert a common disaster clause in your will. Without it, consider this scenario: If you and your spouse were to be in a fatal accident and one partner was to survive the other by only a couple of days, your assets would go through probate twice (once for your will and once for your spouse’s will).

To avoid that, wills usually specify that if you and your spouse die within a short time of each other (such as within 30 days), your estate would instead go to contingent beneficiaries — your children, for instance — rather than to your spouse.

6. Beware of joint (asset) pain.

Many people believe that assets jointly held by two people don’t need to go through probate if one person dies. There’s some truth to that. For example, joint accounts usually transfer directly to the surviving accountholder. But check the wording of your account agreement, to confirm. It’s wise to have a lawyer or accountant reliably sort through the fine print of your situation.

For instance, if the joint title on your home (listing yourself and your partner as owners on the property’s deed) is registered in a way that includes right of survivorship, on the death of the first partner, the surviving partner gets full title to the home, and it doesn’t have to go through probate. That scenario can make a lot of sense, both now and after one of you dies.

But if the only reason you want joint title on an asset now is so your estate can avoid probate costs later, beware. Putting another person’s name on your assets can open the door to serious problems while you’re still alive. Two examples:

  • You jointly own a house that is debt-free. But if your joint owner has debts that are in arrears, his or her creditors might be able to make a claim against your home.
  • You have some money you’d like your son or daughter to get when you die, so you decide to open a saving or investment account now, in both your names. But if only one signature is needed on withdrawals, your son or daughter could clean out your account. And if he or she splits up with a spouse or common-law partner, your child’s ex might claim a share of your money. And, if you don’t document the fact that the joint owner is to get the proceeds of the account for his or her own use after your death, another heir may claim that you made the arrangement strictly to help you manage your finances — in which case the account forms part of your estate.

7. There’s no probate for life insurance or registered accounts with named beneficiaries.

If you name a beneficiary for your life insurance or registered accounts such as RRSPs, registered retirement income funds (RRIFs) or tax-free savings accounts, those assets usually pass to those beneficiaries outside the estate and don’t go through probate. It’s best to name a secondary or contingent beneficiary as well, in case your primary beneficiary dies before you do.

8. You can have two wills.

In some provinces, you can have more than one will. An Ontario court case (Granovsky Estate v. Ontario) set the precedent in that province, recognizing that one will can be used to distribute assets that go through probate and a second will can be used to direct distribution of assets that don’t need probate (such as shares in a private corporation where directors have agreed not to require probate). If you’re considering this, the two wills need to be carefully worded, so one doesn’t cancel out the other. You’ll need to speak with a lawyer who specializes in estate planning to make sure it’s done properly.

9. Give gifts now.

Rather than use a probated will to distribute all your assets, another option is to give some cash gifts now. In Canada, there are normally no tax consequences to the recipient (see Amounts that are not taxed, on the CRA website) — except if you receive a cash gift from someone who owes money to the Canada Revenue Agency (CRA). In that case, the CRA may come after you.

10. You can use a trust or private company to bypass probate.

It’s possible to set up a trust or private company to own your assets so they won’t go through probate. Talk to your lawyer about the costs of creating a trust or company. It’s important to note, however, that avoiding probate fees shouldn’t be your only reason for following a particular strategy. Sometimes, the cost of probate can be much lower than the cost of avoiding it. For example, in Alberta, one of the provinces that charge low probate fees, the most you will pay for probate is $400.

11. Probated wills aren’t private.

Once probate is granted, your will becomes a public document, available for anyone to view. So think twice before using your will to have the last word in that feud with your sibling, if you don’t want to air your family’s dirty laundry.

Probate is a complex topic and experts spend their lives learning to understand this stuff. That’s why it’s a very good idea to consult a professional both when you’re making your will and when you’re the executor for someone else’s. And expert advice about estate and financial planning can help you not only leave your estate in good shape, but also make the most of your retirement years.

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