Some Canadians will go to great lengths to avoid probate fees and to reduce taxes applied to their estate. Indeed, estate planning strategies such as adding an adult child to the title of primary residence or a cottage, or as a joint owner of a non-registered account, can unknowingly expose you or your child to potential costs and unnecessary risks. Before you tie yourself in knots trying to avoid probate fees, let’s answer some important questions about what exactly probate is, which assets are subject to probate, and what you can do, if anything, to reduce or avoid them. We’ll also look at what people get wrong about probate, along with the potential pitfalls that can be caused trying to avoid probate – at the expense of good tax, financial, and estate planning. Here are some of the questions I am getting asked lately from clients: Q: What are probate fees? Probate fees in Canada refer to the costs associated with the legal process of validating a deceased person's will and distributing their estate as per their wishes. These fees are usually payable to the provincial or territorial government where the deceased resided, and they are calculated based on the value of the assets within the estate. The fees cover administrative expenses and court procedures required to ensure a smooth transfer of assets to beneficiaries while complying with legal regulations. Q: Which assets are subject to probate fees? A: When an asset is left to your estate, it may be subject to probate. Certain assets that allow you to name a beneficiary may pass outside your estate – for example, RRSPs, TFSAs, and life insurance policies where you’ve named an individual as the beneficiary. If assets are held in joint tenancy with rights of survivorship, or owned by a trust, they may bypass probate as well. Other assets like personal non-registered accounts, bank accounts, personal effects, or real estate do not allow you to name a beneficiary, so in many cases those assets will be part of your estate. It’s worth noting that while assets can pass to your surviving spouse without tax, that doesn’t mean the asset won’t form part of your estate. Unintended consequences Q: What do people get wrong about probate? A: Probate is an important process in winding up an estate. It validates that your will is current and indemnifies people and institutions that hold your property from giving it out to the wrong beneficiaries. Often, planning is done with the intention to avoid probate fees. And often, that planning has unintended consequences. For example, adding an adult child as a joint owner on your bank account is advertised as a way to allow the bank account to pass to the surviving owner, outside of the estate. But it’s not that simple – adding a signer to an account might trigger resulting trust rules, where the asset is deemed to be held in trust for the estate. How to reduce probate fees Q: So, what can people do to help reduce probate fees? A: Where appropriate, name individuals as beneficiaries on allowable accounts – RRSPs, TFSAs, and life insurance policies for example. But be aware that naming beneficiaries can have unintended consequences, like a disproportionate inheritance for certain beneficiaries. For higher-net-worth Canadians, using trusts may be appropriate. These are complex structures that come with other costs, but assets held in trusts generally do not go to your estate and are therefore not subject to probate. Notes about gifting money while you’re still alive: There is no gift tax in Canada, though gifting money to a spouse can have tax consequences. Gifting to adult children who are beneficiaries of your estate keeps that money away from probate and allows you to see your heirs benefit from the gift while you’re still alive. Q: What are some of the unintended consequences of adding your child(ren) to the title of your house, cottage, or non-registered account? A: Moving accounts and real estate to joint ownership is a popular strategy with the masses for avoiding probate. People do this because, when an asset or account is owned joint with the right of survivorship, the account will bypass the estate and the holdings will not be subject to probate. The problem is, while simple to do, joint ownership opens up a minefield of potential issues. It's worth noting that, people almost never get proper legal, tax, or financial advice before doing this – which can lead to many issues. Adding your child(ren) to the title of your primary residence Q: What about adding your child(ren) to the title of your primary residence? A: It’s one of the most common questions, as the primary residence is usually the largest asset left behind by the parent. A primary residence for an individual or married/common-law couple is exempt from capital gains taxes, so a parents’ home is exempt, and a child’s primary residence is exempt. If the child is put as joint owner on the parent’s home, the parent’s 50% ownership of the home remains tax exempt (and capital gains up to that point is of course exempt), but the child then partially owns a second property, and that share of the property is not exempt. Q: So, what should a parent do instead? A: In general, don’t make the primary residence joint with your child(ren). Expect it to flow through your estate and expect to pay probate fees on that. Otherwise, if you plan on diverting from that path, only do so after consulting an estate planning lawyer – not because you read online that it’s a good idea or because a friend or family member suggested it Final Thoughts It’s a complicated topic that gets brought up a lot, and there is a lot of misinformation floating around online and at the water cooler on how to avoid probate. The key takeaways are that, in most cases, probate fees are minimal, and probate ensures the proper disbursement of your assets after you die. There’s no need to tie yourself in knots trying to avoid probate fees if it means opening yourself and your child(ren) up to other potential issues. If you do have a complicated estate or specific wishes you want carried out, get proper advice from an estate planning lawyer and a CERTIFIED FINANCIAL PLANNER, like myself, before you start adding children as joint owners and beneficiaries of assets and accounts. That includes proper documentation declaring your intentions behind these actions. Don’t leave important matters up for interpretation.
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AuthorBrandon Yanchus is a CERTIFIED FINANCIAL PLANNER™ with over a decade of experience. This is his personal blog where he shares what he's learned helping families, professionals, business owners and retirees grow and protect their wealth. Archives
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