WHAT IS PROBATE?
When a person dies, his or her assets are eventually distributed out to others such as family members, friends and charities. Most people die owning real estate, securities, funds in bank accounts, businesses and vehicles. If assets require a third party to complete the transfer from the deceased's name to the deceased's estate or to a beneficiary, then the third party will request that the deceased's Will1 be officially "approved" by the court as a valid Will and that the executor has the power to deal with the assets of the estate. The court issues a grant of probate, which once obtained, the third party is assured that the transfer it is being asked to complete is based on a valid Will and no one is disputing the contents of the Will.
For example, a financial institution will not transfer funds out of a deceased's name and into a new account, unless it is presented with a grant of probate with the Will annexed (attached). Another example is in respect of one of the largest asset that many people own: a home. The Land Title Office will not transfer real estate property unless a grant of probate is issued.
HOW ARE PROBATE FEES CALCULATED?
In British Columbia, the following fees apply:
- a $200 dollar filing fee (unless the value of the estate is below $25,000);
- 0.6% on the value of an estate between $25,000 and $50,000; and
- 1.4% on the value of an estate over $50,000.
As a general rule of thumb, probate fees are estimated at 1.4% of the value of an estate. Due to the increasing value of real estate, it is no longer uncommon to see more estates valued in excess of several million dollars. Our office recently received a grant of probate for an estate of a person who lived a modest lifestyle but who died owning a humble home on the Vancouver west side that sold for $2.9 million. The total probate fee payable to the court was about $40,000. Typically a cheque for the probate fee is made out to the Ministry of Finance before the grant of probate will be issued.
PROBATE FEE AVOIDANCE
Probate fee avoidance planning includes:
- designating beneficiaries of pension plan, RRSPs, RRIFs, TFSAs, life insurance policies, etc.;
- transferring property into joint tenancy;
- transferring property into a trust;
- implementing a dual Will strategy for private company shares, loans receivable, art and jewelry; and
- gifting assets during one's lifetime.
Caution must be taken before employing any of these strategies and the cost of the probate fees should be weighed against the legal and income tax consequences. Such consequences include:
- triggering capital gains taxes on a transfer or gift;
- potential loss of a principal residence exemption;
- loss of control over the asset; and
- exposure to the creditors of the joint tenant.
In a complex family situation, transferring assets to one family member to the exclusion of others may give rise to challenges concerning the deceased's intention. Was the transfer a real gift or merely for probate avoidance purposes and the deceased actually intended that the asset remain part of the estate? Were the deceased's intentions properly and accurately documented?
Where different beneficiaries receive different assets, unexpected tax consequences may result. For example, a plan where Child A is named as a designated beneficiary on an RRSP account valued at $1,000,000 and Child B is added as a joint tenant on a principal residence valued at $1,000,000 on the surface appears equal and a good way to avoid probate fees.
However, income tax consequences must also be considered. Assuming the home qualifies for the principal residence exemption, no capital gains taxes will be payable in respect of this asset. However, the RRSP account is fully taxable at death. Therefore, a plan which appeared workable on the surface has now resulted in a significantly unequal distribution and has the potential to create conflict between family members.
DOUBLE PROBATE FEES ON THE SAME ASSETS
In the case of a couple, if proper planning is not considered, then probate fees may be paid twice on the same asset. For example, when the first spouse dies with an interest in real estate and private company shares held personally, probate fees are calculated on the market value of those assets. Assuming the surviving spouse inherits those assets, when the death of the second spouse occurs, probate fees may be owed once again.
It is possible to successfully employ one or more strategies to avoid probate fees. However, the risks must be carefully considered and legal advice is recommended. Probate avoidance planning should encompass your overall estate planning and wealth preservation strategies.
PROCEED WITH CAUTION
If you are a financial industry professional and your clients ask you to create joint bank or investment accounts with one or more children, proceed with caution. You should recommend that your client seek legal advice to fully understand the risks, tax implications and consequences. It is very important that the intentions of the parties are appropriately documented in a Deed of Gift or a Bare Trust Agreement, depending on the circumstances. If there is a disagreement after your client's death (or during an incapacity) about the true ownership of the assets, then you and your financial institution may become parties to an estate litigation action.