Much time and effort in recent years has been devoted to avoiding the need for probate. Probate is a court process whereby the Court verifies that a person has died, and confirms the validity of the Will and the appointment of the Executor (Estate Trustee). Probate covers the banks and others, and releases them from any concern about the identity of the proper beneficiaries. Without a certificate from the Court, a bank, for example, could be at risk of having to pay more than once – as long as they pay in accordance with a Will that has been probated, they are in the clear. For the privilege of covering the backside of the banks, the Ontario Courts will charge 1.5% of the value of the estate in excess of $50,000. The Province recently eliminated probate fees for any amount under $50,000. These charges are now called the Ontario Estate Administration Tax (OEAT).
The following will give you an idea of the cost of probate:
Certain types of property do not need probate. Insurance policies and insurance based financial products, such as segregated funds, do not need to be probated. In addition, property held in joint ownership does not need probate – it simply passes to the surviving joint owner. Many people transfer property into joint ownership with their children to avoid probate. However, this can trigger unintended consequences:
Tax Implications: Transferring property to a child triggers a deemed disposition, and taxes on the fair market value become payable.
Liability Risks: The child’s creditors could make claims against the property.
Ineffectiveness: Such transfers may still not avoid probate due to legal presumptions.
The Supreme Court of Canada’s 2007 Pecore case clarified that a transfer to joint ownership with a spouse is presumed to be a true transfer. Conversely, transfers to joint ownership with adult children are presumed to result in the child holding the property in trust for the parent. While this presumption can be rebutted with clear evidence, it complicates probate avoidance efforts. Furthermore, other beneficiaries of the estate could challenge these transfers.
Granovsky Case and Dual Wills
In Ontario, the 1998 Granovsky case allowed for the use of multiple Wills. One Will can include assets requiring probate, such as portfolio investments, bank accounts, and real estate. A separate Will can include assets exempt from probate, such as shares of private companies and personal effects. This strategy minimizes probate exposure by excluding assets that do not require court oversight.
Alter Ego and Joint Partner Trusts
In December 1999, the Department of Finance introduced legislation enabling two new forms of inter vivos trusts: the alter ego trust and the joint partner trust. These trusts aim to avoid probate and offer additional planning opportunities:
Alter Ego Trust: Exclusively benefits the taxpayer during their lifetime, for both income and capital.
Joint Partner Trust: Benefits both the taxpayer and their spouse or common-law partner during their lifetimes.
To qualify, the trust must:
Be created after 1999.
Be established by a taxpayer aged 65 or older.
Both trusts allow property transfers without triggering deemed dispositions for income tax purposes. In addition, the transfer of real estate to one of these trusts does not trigger the payment of Land Transfer Tax. The property is registered in the trust’s name, removing the need for probate upon the individual’s death. However, during the individual’s lifetime, only they (or their partner, in the case of a joint partner trust) can receive income or capital. Upon death, the trust undergoes a deemed disposition, and taxes become payable. This arrangement mirrors the tax consequences of direct ownership but avoids probate.
Planning Opportunities
These trusts offer additional advantages:
Private Company Shares: They can bypass stop-loss rules when shares are transferred, avoiding capital loss restrictions.
Surviving Spouse in Business: Including a surviving business partner as a trustee can ensure smooth operations while maximizing tax efficiency.
Cost Savings: Joint insurance policies for spouses are less expensive than single-life policies.
Taxation of Trusts
A drawback to these trusts has been their treatment as inter vivos trusts, which are taxed at the highest personal rates. Testamentary trusts previously enjoyed graduated rates, but legislative changes limit this benefit to three years post-death, reducing the disparity.
Conclusion
A well-drafted alter ego or joint partner trust provides significant tax and business advantages, including avoiding probate fees. For larger estates, these savings can be substantial, making such trusts an essential component of effective estate planning.
Charles M. Rotenberg
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