How to Minimize Probate Fees
Benjamin Franklin said,
In this world nothing can be said to be certain, except death and taxes.”
When you put these two together, you get probate tax.
What is probate?
Probate is a provincial court process that proves the validity of your last will and testament, that the death occurred, and that your executor has the legal authority to act under the will.
Your will remains a private document until it is probated, then it becomes a public record.
Before applying for probate, your executor has to determine if probate is required. Not all wills have to go through the probate process. Most financial institutions require probate although, sometimes they may waive this requirement if the account is small. However, if even just one financial institution requires the executor to apply for probate for one asset, all the assets being distributed by the will are included in the probate calculation.
How much does it cost?
Probate tax or fees are charged by the provincial government. It is based, on the value of the assets distributed through a will or according to the intestacy formula.
Every province has a different probate tax schedule. Some provinces use a low fee schedule that’s like an administration fee that tops out at $140 (Yukon) to $525 (Alberta) regardless of the size of the estate.
Other provincial governments seem to look at probate as a way to collect revenue and have increased the rates to as much as 1.5 – 1.65% of the value of the assets that are being distributed through the will, with no maximum cap.
Ontario, for example, is a province that charges by a sliding scale:
0 if less than $1,000
$5 per $1,000 on first $50,000, plus
$15 per $1,000 over $50,000
Find out what your province charges for probate here.
Avoiding, or minimizing fees
Since probate fees are calculated on the value of the assets that are distributed through a will , the basic strategy to avoid or at least minimize the fees is to distribute as much as possible outside the will.
If you have a large complex estate, live where there is no cap on probate, or where the rates are the highest, this tax is just too much to pay if you can avoid it.
To prevent assets from becoming a part of your probated estate consider these strategies.
- Designate beneficiaries on your life insurance policies as well as your registered accounts. Insurance proceeds, RRSP, RRIF and Tax-Free Savings Account monies will be paid directly to the named beneficiaries. Name a secondary beneficiary as well, in case your primary beneficiary dies before you do.
- Joint ownership. Assets which are held jointly with rights of survivorship pass directly to the surviving joint owner.
- Give gifts now. Giving away cash gifts and/or some of your assets now will reduce the value of your estate and help your heirs today. I would never suggest giving away assets just to avoid probate. Make sure it doesn’t hurt your ability to provide for yourself going forward.
- Spend it. What did you do all this saving for anyway? Enjoy the money while you can. Spending doesn’t just mean acquiring things, it includes long dreamed of experiences and creating memories for your family.
- Set up a trust. You title your property to the trust (inter vivos) and appoint a trustee (can be you). The trust then distributes the property after your death. Testamentary trusts are used after death. Talk to your lawyer about costs first to see if it’s worthwhile.
- Insert a common disaster clause in your will. If you want to leave your estate to your spouse and you both die within a couple of days of each other, your estate would go to a contingent beneficiary – your children perhaps – and avoid going through probate twice.
Some cautions when trying to avoid probate tax
It may not always make sense to make significant efforts to avoid probate fees. Think of the cost-benefit, the value of your assets and the needs of your family. The cost to set up and maintain some strategies could be more than the potential probate fee you’re trying to avoid.
Many of the strategies that might work in other provinces are not available in Quebec, such as joint ownership with rights of survivorship and most beneficiary designations.
There can be drawbacks to adding a joint owner so make sure you consider:
- A joint owner can help themselves to your accounts without your knowledge or consent.
- You will need the consent of the joint owner if you want to sell the property or take a mortgage against it.
- If your joint owner has debts that are in arrears, his or her creditors might be able to make a claim against your home.
- There may be tax consequences (deemed disposition) such as capital gains unless the person added is your spouse, or land transfer taxes on real estate.
The bottom line
It’s a good idea to consult with a qualified estate attorney and tax specialist before implementing any strategies that would end up costing you more than any probate tax you might save – or have other unintended consequences.