Avoid or Reduce Probate Fees
What are Probate fees?
These are fees (taxes) levied by Provincial Governments upon the death of an individual (sometimes referred to as Death Taxes). They apply to net assets (Assets less Liabilities) in an individual’s Estate. The fees themselves aren’t that large. They are a little over 1.5% on average.
It is the formal filing for Probate that can be tedious, time consuming and sometimes difficult.
It’s an area where you will always want a Lawyer to assist you with the process.
Is there something you can do to reduce or eliminate this Probate process and its related fees?
Well, yes there is.
If you structure your affairs so there are no assets in your Estate when you die then you can by-pass these probate fees (taxes) altogether.
When people pass away it is always a traumatic and emotional time. Surrounding these emotions everyone hopes the financial matters will be easily resolved and within a short timeframe.
Access to assets and resolution of debts may take longer than anyone would have thought. It could be months versus weeks.
A Properly Executed WILL:
Having a properly executed WILL that outlines the deceased’s desires is often seen as the easiest way. But when it comes to by-passing probate it‘s not. A WILL is critical when is comes to the formal division of assets in a family environment where the trust between beneficiaries is not as high as one would expect or when the estate is complex.
With a WILL you must have detailed information on all of the Estate’s assets and liabilities collected, summarized, reported and then dispersed.
This will require a lawyer to ensure all of the proper documents have been signed and appropriately filed for the Estate to complete its Probate requirements.
How much time this will take will depend on how easy it is to determine all of the assets and liabilities?
It may also require up to a six month waiting period to ensure all parties and distant, immediate family members have been properly notified and have been made aware of their rights.
Use JOINT Accounts:
The easiest way to sidestep probate fees is to use JOINT ownership on your bank accounts or other Non-Registered investments.
Couples normally have JOINT accounts which gives the surviving partner immediate access and ownership in the event their partner passes away.
I recommend families consider having one of the adult children as a Joint owner in the event one parent has already passed away.
A JOINT account automatically becomes the sole property of the surviving joint owner and is immediately available to them for whatever purpose they wish.
In this situation, the account would not be subject to probate as it does not form a part of the Deceased’s Estate.
Keep in mind the surviving account owner (assuming this is an adult child and not the spouse) would normally be required to share these accounts with their siblings, unless some prior, formal acknowledgement was made that states otherwise. Sibling lawsuits are created from such non-sharing activities.
Another important area is to ensure accurate BENEFICIARY Designations have been made on your Life Insurance policies, RRSPs, Defined Contribution Pension Plans, Locked-In Retirement Accounts, RRIFs, LIFs, etc. Don’t forget about your Group Life and Group RRSP plans as these can sometimes be forgotten.
Having proper beneficiaries mean the funds go directly to those who have been named.
These transfers to beneficiaries will by-pass the Estate as the funds are paid out directly to those beneficiaries.
As the money never went into the Estate they are not subject to Probate or the related Probate Fees.
If the Beneficiary is the spouse then Registered (RRSP RRIF, LIF and LIRA type) Products will pass directly to the spouse on a tax free basis. Usually this requires a form or two but that’s all. Here again the Money never touches the Estate so no probate fees will apply. Because of the tax free nature of Registered Spousal transfers no taxes will apply on the rollover.
For beneficiaries (other than spousal), the transfers will come to you but will be subject to income tax.
Let’s take a simple example of an RRSP distributed to adult children: (Assume this is the only asset):
The proceeds from the RRSP get paid out to the beneficiaries directly from the Financial Institution.
The Estate is not involved as the money was never sent to the Estate.
As this was the only asset, the Estate never received any money from the RRSP and consequently the Estate has no Money.
CRA is expecting to receive Taxes on the RRSP as all withdrawals from RRSPs are Taxable (just as if the Estate received the RRSP assets directly).
Note: CRA is a Federal income taxing Department while Probate fees are a separate Provincial issue.
Where the Estate does not have sufficient assets to pay the applicable tax then CRA reserves the right to collect any remaining tax directly from the beneficiaries.
As a Beneficiary you need to be sure you are knowledgeable about the deceased’s estate before spending all the money you receive. A surprise may await you from the tax man if you are not aware of the Estate’s ability to pay the tax.
In this example, this RRSP was the only asset and it never went through the Estate. CRA will come to the beneficiary for tax payment. The taxes to be paid will be based on the Deceased’s tax rate not the beneficiary’s.
Remember, in many circumstances the Estate may have other assets going through it even though ‘certain assets with specified beneficiaries’ can by-pass the Estate process. If the Estate does have other assets then these might be used to pay the taxes. In our example, the Estate only had the one RRSP so no other assets were available.
Having a WILL is an important Estate Planning tool.
It is the default strategy when all assets cannot be directly rolled over to beneficiaries or when specific wishes of the deceased need special attention. In complex asset situations it may be the only choice.
Joint Account Ownership and Beneficiary Designations can be extremely helpful tools in asset transfer and reducing or eliminating probate fees. It’s quick and easy and is best suited in simple estate situations. They can also be used effectively as part of more complex estate distributions.
Another ESTATE Planning tip from Robbins Financial. Please feel free to share this with your friends and family.