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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It’s the end of the 2022/23 RRSP season. If you’re over the age of 25, this likely isn’t a new experience. The ads and reminders to top up your retirement accounts are endless, and it seems like a mad dash to the March 1st deadline. Being the diligent investor that you are, you’ve maxed out your Tax-Free Savings Account and either set up monthly savings or contributed a lump sum to max out your RRSP contribution for the year. So, you are doing everything you should be, right? Probably.
But, what if I told you that there is a new problem arising in personal finance. What if you’re saving TOO MUCH for retirement? That’s right! You’ve worked hard your entire life, stocked away your savings diligently so that one day you can live on easy street and travel the world – or at least that’s what you’ve planned. It’s the concept of delayed gratification at its core; putting away money today during my working years so that years down the road I can finally enjoy retirement. But it really makes me wonder, are retirees really enjoying their fruits of their labour to its fullest? I look at my own parents as an example. (Hi Mom, I know you’re reading this and I love you!) My parents worked incredibly hard to put us through school and save for their retirement. Now at age 65 and 68 I am noticing they really hesitate to spend and enjoy their savings. They are not alone. Layer on the effects of a 2 year pandemic where spending for enjoyment was limited. This only increased Canadians’ savings to historically high levels. When you go from the mentality of ‘save, save, save’ from the age of 25 to 65, it’s not like a switch flips to make it simple to turn off that mindset to that of ‘spend and enjoy’ your wealth. I see this now more than ever in my work with clients and I know I am not alone. Countless studies are showing that retirees’ net worths are actually growing during retirement and consumption, and possibly enjoyment, is at historically low levels. So, how could you take a more balanced approach? Maybe the traditional mindset of working tirelessly, not taking that extended vacation or sabbatical in an effort to bolster up your retirement savings every year of your working life needs a revamping? I personally believe it does. We are now living longer than ever and more and more Canadians are pushing back retirement to either work longer or part time. Why? It could be because they haven’t saved enough. Or they just really love what they do and have no plans of slowing down – and that is okay. There is no one size fits all approach to saving for retirement, trust me. I think it’s the psychology of saving for tomorrow vs. spending today that needs work. We are taught from a very young age that saving, cutting expenses, and limiting ourselves as the only way to build wealth. How many headlines shout strategies to reduce spending by cutting out your favourite Starbucks drink or cancelling Netflix and limiting our lifestyle at the expense of a life with pleasure. While saving is incredibly important and something that I both practice and preach – we need to learn how to spend too. Having worked with clients in my day job as a CERTIFIED FINANCIAL PLANNER™ for 10 years, I can confidently say that most affluent Canadians are great at saving, and not so good at experiencing without worrying. What if I told you that I have personally witnessed clients pass away with 7 figures left in their retirement accounts? Sure they will pass on an incredible legacy for their family, church or charity and we have built that into their plan. But did they enjoy life to its fullest? What if they spent a bit more to experience the joys in life, instead of putting it into their bank accounts? Would they have been able to buy back more time? Would they have created more memories with their family? Could they be happier? I’ll be thinking, and writing, in the months to come about what it truly means to live a rich life. And (hint, hint) what if you don’t need to be a millionaire to live a rich life? Would you be curious to know more about why I think it’s about mindset, not net worth? Stay tuned. Yours in wealth and health, Brandon Yanchus |
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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