What is Probate and Can I Avoid it?

What is Probate Article Silver & Gold magazine

As an Estate Planner I get asked this question all the time. I find that most people know a little bit about probate, but don’t really understand the entire process and the costs involved.

Probate is the Provincial Court’s process for validating a Will and verifies the appointment of the Executor. When one spouse passes, all assets and liabilities usually become that of the surviving spouse therefore, the probate process is not necessary. However, when a widower or single person becomes an angel – the probate process is required. At this point, all assets are frozen until the probate process is complete and the Court issues a Certificate of Estate Trustee to the executor.

When submitting a Will for probate, the lawyer must also submit a summary of the estate’s assets and their approximate market value, in order for the probate fees to be calculated. The assets to be reported for probate are: home, cottage and other property, bank accounts, mutual funds, GIC’s, shares, savings bonds, and any valuable art or jewelry collection. An estate valued at $10,000 or less generally does not need to be probated and an estate with a value of $50,000 or less only pays a 1% probate fee. Most people don’t realize that a probated Will becomes a public document, which can unwontedly expose personal and financial information.

For estates that exceed the $50,000 valuation a 1.5% probate fee is payable to the province of Ontario. Again, what many people don’t realize is that all other estate fees will be based on the value submitted for probate. The lawyer is entitled to charge up to 5% of the value submitted for probate, the accountant – who needs to file the terminal tax return – is entitled to charge up to 5%, and the executor is entitled to 5%. At the end of this lengthy estate settlement process, the estate can be reduced by a total of 16.5% in fees before any funds reach the intended beneficiaries.

A common strategy used to avoid probate is adding a joint owner to an asset such as a home or a bank account. While this may avoid the fees, it could open up a can of worms in terms of liability and intent, which can end up costing the estate much more than the avoided probate fees. A deemed disposition of the asset is also to be reported to Revenue Canada, which could also create a tax issue for both owners.

The simplest strategy I know of to avoid much of the probate process and the fees associated with it, is to hold your savings and investments at a life insurance company who offers Segregated Funds. With a named beneficiary on the account (even Non-Registered accounts), proceeds are usually paid out within two weeks, directly to the beneficiaries and do not form part of the Will or the estate value submitted for probate. This would keep financial matters private and eliminate the fees of up to 16.5% (which equals $82,500 on $500,000 of GIC’s at the bank).

If you find the right segregated funds, the management fees inside the fund are only a fraction higher than the average mutual fund – so it’s like you are getting the added benefits almost for free. You have a wide variety of funds to choose from, such as GIC’s, bond, dividend, balanced and equity funds and they also include principal guarantees of either 75% or 100% of your deposit.

The probate process can’t always be avoided completely, but by structuring your savings correctly, you can save your executor and beneficiaries a lot of time and your estate a whole lot of fees. The next time you are talking to your Financial Planner, ask if he or she can offer you the estate friendly benefits of segregated funds.

as appeared in Silver & Gold Magazine Sept/Oct 2011

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What is Probate Article Silver & Gold magazine

In 1793 the first legislation dealing with the issue of probate tax was enacted in Canada. In 1950, the legislation was amended and the tax was designated as a ‘service fee’, but in December 1998 Ontario replaced the term probate fee with Estate Administration Tax. Although the probate process is basically the same from province to province (with the exception of Quebec) the terminology and the fees vary widely, depending on the laws of the province.

As governments around the world tighten their belts and search for additional revenue, the Ontario government took decisive action and recently made dramatic amendments to the Estate Administration Tax Act, 1998, which governs what most people still call ‘probate fees’. With so many Ontarians implementing financial planning techniques to avoid the probate process over the past 20 years, it has had an adverse effect on projected Estate Administration Tax revenues. In May of this year, Ontario’s Bill 173 quietly received Royal Assent and will come into effect on January 1, 2013.
Ontario’s new Bill 173 requires the Executor to “give the Minister of Revenue such information about the deceased person as may be prescribed by the Minister of Finance … within the time and in the manner as may be prescribed by the Minister of Finance”. In short, this means the Minister will likely require an inventory of estate assets along with proof and a declaration as to the value of each of them. This provision is similar to ones already in place in other provinces such as BC, Saskatchewan, Nova Scotia, and PEI, who also require Executors to keep detailed records and books of account that enable the accurate determination of the tax payable.

Of greater concern is the new four year assessment or re-assessment period, which comes with a minimum fine of $1000 or a maximum fine of twice the tax payable and/or imprisonment for up to two years, if the estate representative (Executor) misrepresents information or asset values to the Minister. These new audit and verification powers given to the Minister of Revenue are modeled after the federal Income Tax Act and the Ontario Retail Sales Act.

With an already slow probate process in Ontario, this new legislation will undoubtedly make it more costly and more time consuming to wind up an estate and result in greater potential liability for the Executor.

as appeared in Silver & Gold Magazine Nov/Dec 2011

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