In Ontario, 1 estates lawyers are routinely faced with questions regarding probate tax and probate planning. This article discusses some often-asked questions.
What is Probate Tax?
"Probate tax" (formally, Estate Administration Tax) is paid when an application is made for a Certificate of Appointment of Estate Trustee to prove the authority of an executor to administer a deceased's estate and, if the deceased died with a Will, to prove the validity of that Will (a process often referred to as probating the Will). 2 Whether such a Certificate is needed generally depends on the type of assets owned by the deceased at death, and whether they died with a Will. For example, when an individual dies with a Will, the Will gives the named executor the authority to act; however, third parties sometimes require proof of that authority before allowing such executor to administer the deceased's assets. The named executor obtains this proof by applying for a Certificate of Appointment from the Ontario Superior Court of Justice. 3
How is Probate Tax Calculated?
Probate tax is currently calculated as 1.5% of the value of the assets administered under the Will being probated above $50,000. 4 Therefore, if the assets flowing through a Will had a value of $2,050,000 at the deceased's death, $30,000 of probate tax would be owing as part of the application (calculated as ($2,050,000 – $50,000) x 1.5%). Certain asset values are not included in the calculation (e.g., the value of assets that flow outside of the Will and of real estate outside Ontario). Where Ontario real estate is concerned, the value to be included in the calculation is the value less encumbrances.
What is "Probate Planning"? Can Probate Tax Exposure be Minimized?
"Probate planning" is used to describe taking steps to reduce exposure to probate tax. A number of strategies can be employed to do so, but it is important to remember that no two situations are the same. Each individual must consider their own personal circumstances, including their wishes regarding asset distribution, and should get legal advice from a qualified estates lawyer before engaging in probate planning. Some examples of probate planning opportunities, as well as high-level comments on each, follow:
- Multiple Wills
In Ontario, a common probate planning strategy is the execution of multiple Wills. As mentioned above, probate tax is calculated based on the value of the assets being governed by the Will being probated. Certain assets would not need a probated Will to be dealt with (e.g., probate is often not needed to deal with shares in closely-held private corporations and personal effects).
This strategy generally separates assets into two categories. One Will (often called the "Secondary Will" or "Non-probated Will") governs the distribution of assets that do not need a Certificate of Appointment to be administered, and the other Will (often called the "Primary Will" or "Probated Will") governs the distribution of the remaining assets. Only the value of those assets that fall under the Primary Will being probated would be exposed to probate tax. The cost and added complexity of this planning is often weighed against the possible probate tax savings on death.
For example, consider the business owner that holds shares in a private corporation worth $1,000,000, where the other shareholders do not require proof of the executor's authority to act. By having a Secondary Will govern the distribution of such shares, probate tax exposure is reduced by $15,000.
- Bare Trust Planning
In Ontario, legal and beneficial ownership can be split, opening the door to bare trust planning using a nominee corporation (the "Nominee"). This strategy involves transferring legal title in an asset to a Nominee while keeping beneficial ownership. Despite being on title, the Nominee is only an agent of the beneficial owner(s) and the relationship between the Nominee and beneficial owner(s) is generally documented by a written agreement or declaration of trust. On the beneficial owner's death, legal ownership remains with the Nominee and beneficial ownership is transferred in accordance with the deceased's Secondary Will (meaning the need for properly drafted multiple Wills). Set up and on-going maintenance costs should be considered before engaging in this planning.
- Designating Beneficiaries
When beneficiaries (other than a deceased's estate) are designated on life insurance policies and registered investment accounts, they pass directly to the designated beneficiaries (not forming part of the deceased's estate) and are not subject to probate tax.
Before designating a beneficiary, consideration should be given to how the designation fits within the overall estate plan (e.g., perhaps liquidity from the registered account is needed to satisfy cash gifts in the Will). Form and content of the designation should also be considered, as well as tax consequences that flow from it (if any).
- Joint Assets
If assets are held jointly so that they pass automatically to a surviving owner on the death of the first to die, then such assets pass outside of the deceased's estate and are not subject to probate tax. This strategy, if effective, would only avoid probate tax on the first death. It is often seen with spouses (e.g., when they own their home as joint tenants, with right of survivorship 5).
There are legal considerations before engaging in this planning, particularly when a parent is contemplating adding a child as joint owner. A qualified estates lawyer should be consulted before taking steps to change ownership, and legal advice should be obtained regarding risks associated with joint ownership (e.g., exposure to creditors), and steps needed for this strategy to be effective (sometimes multiple Wills are needed).
Conclusion
With careful planning it is possible to reduce exposure to probate tax, but what may be an appropriate probate planning strategy for one might not be for another. Probate planning should be considered in the context of an individual's estate plan as a whole, with the benefit of legal advice, and the individual should remember that changes in law, circumstances or the administrative practices of third parties can impact a plan's effectiveness.
Footnotes
1. This article focuses on the laws in the Province of Ontario.
2. An executor may want or need to probate a Will for other reasons; this is beyond the scope of this article.
3. If an individual dies without a Will, someone would apply to have authority to administer the deceased's assets.
4. The value of the estate is rounded up to the nearest thousand (e.g., if the value was $2,049,250, probate tax would be calculated on $2,050,000).
5. As opposed to owning their home as tenants in common.
Previously published by Cidel
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
