Tag: probate fees
Previous entries in our blog have covered inheritance taxes in the United States and other jurisdictions and President Trump’s proposed elimination of the tax altogether. Recent news coverage has zeroed in on how the family of the American president has allegedly evaded over half a billion dollars in tax liabilities that should have been paid on the transfer of significant family wealth.
Certain exceptions apply, but inheritance tax (more frequently referred to as “death tax” by President Trump himself) of 40% typically applies to assets of American estates beyond an initial value of $11.18 million. This means that estates up to this size are exempt from inheritance taxes, while the wealthy engage in complex planning strategies to minimize tax liabilities triggered by death (some of which mirror those used by Canadians in an effort to avoid payment of estate administration taxes on assets administered under a probated will).
Despite Trump’s previous statements that he has independently earned his fortune without reliance on prior family wealth, The New York Times reports that he and his siblings together received over $1 billion from their parents’ estates and that $550 million (55% under the old inheritance tax regime) ought to have been paid in taxes. However, in 1999-2004, during which years the estates of Fred and Mary Trump were administered, a rate of closer to 5% was paid in taxes. Whether the tax-minimizing methods used by the Trump family were legitimate or questionable remains unclear:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes.
Sometimes, the line between legitimate tax-minimizing planning strategies and outright tax evasion can appear thin. It is important to avoid improper strategies that put the assets of an estate and their intended distribution at risk, and which may ultimately serve only to complicate and delay the administration of the estate.
Thank you for reading.
Trusts have been around for hundreds of years, so a type that’s only been around for 17 years is still considered “new” in the trust world. Two types of living trusts (those that you establish during your lifetime) – the alter-ego trust and joint spousal trust – have been available to Canadians only since 2000. These “newer” trusts are worth a quick review, because they can be beneficial in many estate situations.
Trusts with a twist
Like other types of living trust, you create an alter-ego or joint spousal trust by transferring ownership of assets to a trustee (either an individual or a trust company), which then manages and administers those assets for the trust’s beneficiary. But that’s where the similarities end. There are three key differences with an alter-ego trust:
- Unlike other living trusts, there is no deemed sale of your assets at the time of transfer. So, you can roll over assets into the trust without triggering any immediate capital gains tax liability;
- You must be at least 65 years old to settle an alter-ego or joint spousal trust; and
- You must be the sole beneficiary (or you and your spouse in the case of a joint spousal trust), with an entitlement to income and capital during your lifetime. As with any living trust, income retained in the trust is taxed in the trust’s hands at the highest marginal tax rate.
Why consider an alter ego or joint spousal trust? There are a few reasons:
- Bye-bye probate fees: The trust assets do not form part of your estate and are not subject to any probate fees or taxes which may apply. For example, in Ontario – which has the country’s highest estate administration tax – a $1.5 million estate would be liable for $22,000 in taxes. By placing some or all of the estate assets in an alter-ego or joint spousal trust, the estate would benefit from significant tax savings. And if you transfer your principal residence into the trust, the trust maintains the benefit of the principal residence exemption.
- Privacy and protection: Both forms of trust avoid the public disclosure of your named beneficiary and of the assets in the trust, both of which are part of the probate process. They can also offer creditor protection, because ownership of the asset is transferred to the trustee. However, if the purpose of the trust is found to have been set up to avoid or defeat creditors, then those assets can be clawed back and you won’t be able to protect them against creditors.
- Convenience: The trusts also offer protection in the event of incapacity. If you – or both you and your spouse – become incapacitated, the protection of the trust is already in place and the assets continue to be administered by the trustee for your continuing benefit. These trusts can also prevent litigation because it can more difficult to challenge the validity of a living trust than a will.
Of course, you need to balance these benefits with some of the disadvantages. You no longer have access to the capital in the trust, you’re not able to write off any capital losses against capital gains upon death, and there are legal and other costs to setting up the trust, along with ongoing administration expenses, such as trustee fees and the cost of annual tax returns.
For a more detailed analysis of the pros and cons, RBC offers an excellent overview: http://ca.rbcwealthmanagement.com/documents/682561/682577/Alter+Ego+%26+Joint+Partner+Trusts.pdf/3957f00a-c0ea-4917-b02c-f1bc74f44660
Thank you for reading!
This week on Hull on Estates, Natalia Angelini and Lisa Haseley discuss estate planning techniques for reducing probate fees and the pitfalls.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
This week on Hull on Estates, Paul Trudelle and Josh Eisen discuss a private member’s bill that was recently voted down. Before its demise, Bill 120 had proposed a number of interesting changes to probate fees in Ontario, including a maximum fee and deductions for charitable bequests.
Ellen Roseman, “Ontario’s Estate Tax Highest In Canada: Roseman” Toronto Star (6 October 2015)
Bill 120, An Act to amend the Estate Administration Tax Act, 1998, 1st Sess., 41st Leg., Ontario, 2015 (as voted down by the House of Commons 24 September 2015).
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog below.
Click here for more information on Josh Eisen.
Many third parties such as banking institutions and the Land Registry Office require probate as proof of authority to act as estate trustee. Unfortunately, the process of probate brings with it the widely unpopular Estate Administration Tax which is calculated on the value of the assets of the estate. As a result, estate planning methods that seek to remove assets from an estate and transfer them directly to a beneficiary are becoming increasingly popular. These include the transfers of title of real property into joint tenancies with rights of survivorship, adding joint account holders to bank accounts, designating beneficiaries in insurance policies, lifetime gifting and the use of multiple wills.
The challenge that some of these techniques brings is that when used in a way that does not ensure an equal distribution of assets among beneficiaries or when the intentions of the testator are later brought into question, they all too often become land mines associated with an increased likelihood of estate litigation.
The question becomes: what is probate and the resulting Estate Administration Tax really costing us? When avoiding probate at all costs begins to encourage risky behaviours that would not have otherwise been taken, we need to start to consider whether certain safeguards need to be implemented.
In looking to the rest of Canada, we can see in both Alberta and Quebec two alternative models. In Alberta, the probate process has created an upper limit or maximum fee that can be payable. This is currently set at $400.00 for estates of $250,000.00 or more. In this way, the incentive to attempt to distribute assets outside of the will has been largely removed.
In Quebec, they have gone even a step further. There is a flat fee for the probate of any estate, regardless of its value, which is currently set at $105.00. However, if the testator has obtained a notarial will, there is no fee at all as notarial wills are not subject to probate. The will is immediately valid upon the death of the testator and is in and of itself valid proof of the authority of the liquidator (i.e. estate trustee) to act.
Aside from the removal of incentives, there are other precautionary measures that can be taken. For instance, public legal education on the effects of lifetime transfers, joint accounts and joint tenancy could be beneficial. These estate planning tools can be effectively and safely used provided that the testator and any joint tenants or account holders have an accurate understanding of the consequences that can arise as a result of these types of transfers.
Furthermore, obtaining proper and independent legal advice beforehand is always recommended. The law with respect to joint assets is still evolving and can give rise to complex issues that can have significant ramifications for the testator, estate and the beneficiaries.
Thank you for reading.
Listen to Getting Probate
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss probate – what it is and when you need it.
Listen to Probate Issues and Requirements
Read the transcribed version of "Probate Fees"
During Hull on Estate and Succession Planning Podcast #69, Ian and Suzana discuss the topic of probate fees. They discuss probate fees, probate planning, and tax avoidance.
In Ontario, an estate becomes liable for probate fees when the estate trustees apply for a Certificate of Appointment. Depending on the value of the estate, these fees can sizeable and cannot by set off by debts owed by the Deceased or estate-related expenses.
The main reason probate is required is because the estate trustees will require proof of authority before they are permitted to deal with certain assets. For example, generally speaking, banks will not release funds to estate trustees unless they have a Certificate of Appointment. Similarly, estate trustees will usually not be able to transfer real property into their names, list it for sale, or enter in to an agreement of purchase and sale without the Certificate of Appointment. Luckily, not all estates require a Certificate of Appointment to be administered. If the estate trustees can avoid applying for probate, then they can avoid paying probate fees.
There are several planning techniques that can be used to avoid the necessity of a Certificate of Appointment and, thus, paying probate fees:
- Making inter vivos transfers of property – if you give it away prior to death, it won’t form part of your estate;
- Making more than one Will – in one Will you deal with assets that will not require probate, while in the other Will you deal with assets that will;
- Making RRSPs, RRIFs, and insurance policies payable to a named beneficiary, rather than your estate; and Transferring property into joint ownership.
By giving some thought to how you structure your estate, it might be possible to save a significant amount of money on probate fees – or avoid them all together.
Thanks for reading,
Megan F. Connolly