Things to Consider in Estate Planning to Reduce Probate Fees

Estate planning is a very comprehensive process that takes into consideration multiple aspects related to the asset. The end objective is to preserve the value of the estate and ensure seamless transfer to the beneficiaries. To achieve this objective, the estate planner also undertakes tax planning and probate planning. Probate is a legal process of transferring the estate of a deceased as dictated by the will. The estate comprises assets solely owned by the estate owner. Hence, transferring the estate is a big hassle and is subject to probate, irrespective of a will. Where probate is involved, a probate fee, or Estate Administration Tax, comes into the picture, which could be a percentage of the estate value.  

Reasons One Wants to Avoid Probate Fees

While smaller estates might not incur any probate fees, larger estates could face a hefty fee as high as 1.4% of the gross estate value. It is over and above the capital gain tax incurred at the time of transferring the assets. All of this can erode the value of the estate.

Many individuals might want to avoid probate altogether because of the following:

• High probate fees and lawyer fees relating to the preparation of the probate application
• Lengthy process of administering the estate transfer
• Public viewership of probate will compromise the privacy of the estate distribution.

However, there are ways to reduce or avoid probate fees.

5 Ways to Reduce Probate Fees in Estate Planning

The strategy to reduce probate fees revolves around lowering the value of the estate, which is the assets under one’s sole ownership at the time of death. The best way to reduce probate fees is to enjoy and use your estate as much as possible while alive. 

Gift Assets During Your Lifetime

Benefits: Canada allows you to gift your assets tax-free in your lifetime. By gifting the asset, you are removing the asset from your estate and transferring the ownership to the beneficiary. While there is no gift tax, the beneficiary may incur some tax on the transfer of ownership depending on the type of asset.

Risks: While gifting is a good way, you might want to consider transferring the asset you no longer need as you lose access to the gifted asset.

Joint Ownership of Assets, With a Right of Survivorship

Benefits: An asset becomes an estate when you have the sole-ownership. However, if the asset is jointly owned by another person, such as a spouse, it will be directly transferred to the surviving joint owner without being subject to probate. For instance, a house jointly owned by the spouse could significantly reduce the value of the estate and reduce your probate taxes. Since the asset is no longer a part of your estate, you could prevent another legal heir from contesting the ownership of the asset.

Risks: While this strategy will reduce probate tax, it would lead to potential loss of principal residence capital gains exemption (PRE), wherein the owner can sell their primary residence tax-free. Suppose two spouses have 50-50 ownership, only 50% PRE is available to the surviving spouse. It means they will have to pay capital gain tax on the partner’s portion of the house value.

When considering joint ownership, be careful about your relationship with the co-owner. Circumstances change and once the assets are transferred there is little chance to regain sole ownership. The original owner cannot dispose of the asset without the consent of the co-owner. Moreover, in the event of a marital breakdown, the asset may be exposed to claims by the new joint owner’s creditors or their spouse.

Designate Beneficiaries

Benefits: Some financial institutions allow you to designate a beneficiary for RRSPs, RRIFs, TFSA, and life insurance policies. Once you have designated a beneficiary, the asset will be transferred to them without being subject to probate. Remember, the probate is legal proof financial institutions need to validate that the instructions were given by the estate owner, and nobody will contest the claim. When you designate a beneficiary, that itself is legal proof.

Risks: Designating a beneficiary will not avoid any tax implications attached to the RRSP. The withdrawals are taxable and a transfer of funds is a deemed withdrawal if the beneficiary is someone other than the spouse or common-law partner.

Moreover, beneficiary designations made directly on financial institutions’ forms are not flexible as you cannot transfer funds to minor or disabled beneficiaries. Moreover, they do not allow gift overs if one named beneficiary has passed.

Trusts 

Benefits: If you are over 65, you can create an alter ego trust or a joint partner trust and transfer assets there. In such trusts, you are the settlor, trustee, and the beneficiary. You are not holding the assets as the owner but as a trustee. As you transfer the ownership of the assets to the trust, they no longer form a part of your estate, thereby removing the need for probate. You can determine who will get the trust assets after you pass away. Nobody can challenge the transfer, ensuring a smooth transition. Moreover, the privacy of your assets is maintained.

Risks: Trusts have reporting requirements as they have to file income tax returns, declaring any income earned on assets held within the trust.

Multiple Wills 

The probate fees are calculated on the total value of the estate. Not all assets require probate, but because they are in your will that amount gets added to the estate value. You could consider making a primary will for the assets subject to probate, such as real estate and jewelry. For other assets not subject to probate, you could create a separate will. This ensures your probate fee is paid only where required.

Each of the strategies discussed above has its pros and cons. While a strategy may reduce probate fees, it could trigger another liability. Each strategy has to be tailored to your specific financial situation.

Contact DNTW Toronto LLP to Help You with Probate Planning and Estate Planning

A professional estate planner can give a holistic approach to estate planning and devise the right strategies for the right asset to minimize probate fees and ensure a smooth transfer of assets. At DNTW Toronto LLP, our estate planners and tax professionals can provide services such as estate and tax planning. To learn more about how DNTW Toronto LLP can provide you with the best estate planning expertise, contact us online or by telephone at 416.924.4900.