How to Reduce Probate Fees

John Dow, Senior Tax Partner

What is Probate?

Probate fees are the fees charged by provincial governments to probate your Will when settling your estate. Probating your Will is the process of having your Will authenticated and also of confirming the appointment of an executor for your Will.

The Cost of Probate

Probate fees are highest in Ontario at $5 per thousand on the first $50,000 of estate value and $15 per thousand on the excess. This compares to other provinces that are typically $3 to $6 per thousand. The consequence is that Ontario’s probate fees for a modest estate of $500,000 amount to $7,000. There is no “spousal credit,” which means assets that were subject to probate fees on the death of the first spouse, will be subject to probate fees again, when the surviving spouse dies.

Fees Payable on Entire Estate

When your Will is probated, fees are applied to the total value of the assets in your estate. There are no deductions for debts other than those against real estate. For example, if you have a mortgage on your home and a bank loan for your business, the value of your home will be reduced by the amount of the mortgage, but the bank loan will not reduce the value of your business.

How to Reduce Probate Fees Wisely

There are a number of ways you can reduce probate fees without jeopardizing your assets. The two most popular are:
1. Transferring property prior to death
2. Transferring assets outside of your estate

Additionally, small business owners may also avoid probate by having two Wills. One Will deals with the ownership of private company shares and loans. The second Will deals with all other assets.

The Will that deals with the private company shares does not need to go through probate since the beneficiaries do not need the Will authenticated. Also, both Wills may be identical in all aspects, except the assets dealt with in the respective Wills.

Transferring Property Prior to Death

It may make sense to transfer some of your assets to your heirs while you are alive. There is a good reason for this course of action. Such gifts would allow you to enjoy the delight and appreciation of the recipients, along with the satisfaction of knowing you have avoided future probate fees.

In addition to reducing future probate fees, charitable contributions can generate substantial income tax credits now, in the present, which could be lost if donations are made through your Will.

Transferring Assets Outside of Your Estate

Use a life insurance company to transfer money and investment assets outside of your estate. Whether it is life insurance, registered and prescribed annuities, RRSPs, RRIFs, GICs or segregated (mutual) funds, you can keep these assets out of your estate by simply naming beneficiaries in the contracts.

In addition to your RRSP or RRIF, make sure you have named a person — preferably your spouse for tax reasons — as beneficiary of your pension plan and group insurance. Many people name their “estate” as beneficiary when they get a job and never give the matter further thought. If this is your situation, simply ask your employer for a “change of beneficiary” form and change it to the person of your choice.

One of the most popular ways of keeping assets out of your estate is by holding them in joint tenancy. If you are leaving property to your spouse, an adult child or any other person, you may want to consider owning the property with that person as joint tenants. Joint tenancy means that you both have undivided ownership of the property while living, and full ownership will pass automatically to the survivor at death. Probate is avoided because the property does not form part of your estate, but be careful you don’t create other problems in the process.

Tax Consequences

The overzealous use of joint tenancy to avoid probate fees may serve to frustrate other tax planning. Where the property in question is a principal residence, exemption will be lost for all years your joint tenant does not continue to live there.

Except for your principal residence, any property transferred into joint tenancy, with anyone other than your spouse, would be estimated as sold at fair market value. This often results in an immediate taxable gain for the donor.

Maintain Your Sense of Reality

Above all, don’t ever get too carried away in your desire to avoid paying probate fees. Immediate costs such as legal fees and other expenses may cancel out other savings. Joint Tenancy between spouses only defers payment of probate fees until the death of the surviving spouse. Any planning to reduce probate fees should take into account numerous other issues, many of which have been discussed in this article, and professional advice is strongly recommended. Consult with your tax and financial advisors before putting any assets in joint ownership to ensure that you are not putting any of them at risk.

Estate planning is one area where it is very easy to be “penny wise and pound foolish.” A good estate planner can help you far more than you will ever pay in fees and ensure that your heirs pay as little as possible.

Any questions concerning the above should be directed to John Dow, Tax Partner — John Dow or (905) 633-6335.

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