by Michael A. Mann
This article was written by Michael A. Mann as one of his regular contributions to the Canadian MoneySaver Magazine.
Slowly we are seeing the necessity of Probate being avoided either through the planning of the individual or for competitive reasons amongst the institutions. Probate is, of course, the court process by which a Last Will and Testament of an individual (“Testator”), in effect, gets the stamp of approval of a Judge. Once the Will has been probated, the world can rely upon the fact that the Will was indeed the LAST Will of the Testator and anyone who follows the instructions of the Executor is safe from a claim from someone else claiming to be the Executor of the Testator under a different Will.
Probate has been with us for centuries and even though Ontario has changed the name of the process, it’s still with us. It has, however, become more expensive as provincial governments see this step as a logical place to raise money. For example several years ago the Ontario government increased the processing “Fee” to Five Dollars per Thousand on the first Fifty Thousand and Fifteen Dollars per Thousand thereafter. Quite a nice sum for processing what is generally a straight forward application. As the costs increase, people naturally look for ways to avoid those costs. Here are some of the ways in which Probate can either be avoided or the costs thereof reduced:
Gifting—Probate is only required when there are “titled” assets which must be distributed. By “titled” I mean bank accounts, stocks, GIC—anything where a document evidences the ownership or “title”. Any assets which are divested—given away—during lifetime are not part of the deceased’s assets and therefore Probate is not required for them. Elderly parents whose assets clearly exceed their personal needs often undertake a program of gifting to their children. Although this may not eliminate the need for Probate, since the costs of Probate are tied to the value of the assets of the Testator at death, the these costs can be reduced but not eliminated in this manner. One note of caution once you gift something, it’s gone. Err on the side of caution when disposing of assets. Plan a worst case scenario for your economic health and only then if you have excess funds, gift some of it away.
Trust Agreements—Transferring assets into trust for someone has all of the benefits of gifting with the additional benefit that control of the asset can be maintained. You can restrict the access that the beneficiary has to the asset by virtue of the terms of the trust and yet on your death, this asset does not require probate since title to it has previously been transferred.
Joint Ownership—One method which is increasingly employed is the use of joint ownership of assets. Generally where an asset is owned jointly the survivor by operation of law & without the necessity of probate, owns that asset. This is particularly popular for husband and wife situations. There are concerns and risks which should be addressed with your professional advisor, but in many circumstances the benefit outweighs those risks.
Indemnity—In some situations a bank or credit union will accept an indemnity from the executor and/or beneficiary and on that basis will release the funds held by it. Remember that the authority for the Executor to deal with assets is derived from the Will and not Probate. Technically the Executor’s authority starts immediately upon death. It’s just that this authority only goes to the Executor of the LAST Will of the Testator. You can’t be certain that the Will is the last Will until Probate is granted. The indemnity permits the bank to sue the individual who signed the document if anyone else comes forward and can prove that what was represented as the Last Will and Testament is NOT in fact the last Will. Banks will only accept an indemnity when they consider the risk to be small. The factors that are considered are the financial status of the person signing the indemnity, their general knowledge of that person and the size of the funds in question.
Insurance Bond—This procedure provides the protection of Probate to the institution without the time involved in Probate and at a reduced cost to the estate. Most mutual funds purchase an insurance bond. Where the assets of the Testator held by the Fund are less than a predetermined amount, Probate is not required and the bond protects the Fund from a competing claim. If the value is greater than that amount, the Fund usually gives the Executor three choices. The Executor can purchase their own bond, Probate can be obtained, or the Fund will arrange a waiver of probate bond. The bond usually is less than the cost of obtaining Probate. This procedure is being increasingly popular. Look for more institutions to permit the transfer of bank accounts, shares, GIC’s etc on presentation of a bond of insurance. Soon institutions will offer to facilitate the arranging of the bond as a service to their clientele.
Complex Planning—Sometimes a combination of a number of the foregoing points can be used very beneficially. A common approach for a parent who has created significant wealth is to transfer it into a family corporation on a tax free rollover basis and to receive fixed value shares of the corporation as payment for the transfer. A family trust is created and subscribes for the common shares of the family corporation. In addition, a separate class of shares which are voting but fixed in value are issued to the parent for nominal consideration. These shares would possess sufficient voting shares so that the family corporation can be controlled by the holder (the parent). As the investments of the family corporation increase in value, since the shares held by the parent are fixed in value, the only shares which can increase in value are the common shares which are held by the family trust. Effectively the value of the parent’s estate, as far as the investments are concerned, has been frozen. This means that Probate costs won’t increase for the parent. If over time the family corporation redeems some of the shares or the parent transfers all or some of them to the family trust, the value of the parent’s estate reduces in value and so does the Probate cost.
There are many ways to reduce Probate costs and in some situations even avoid all costs associated with Probate. The foregoing should provide some key points for a discussion with your advisor on your personal situation. Be certain to tailor your plan to your particular situation. In tax planning the saying: “Don’t let the tax tail wag the dog” is very appropriate. There are many issues beyond costs that you must consider carefully.