Understanding Probate: What you need to know.

What is Probate?

Probate is an administrative process, involving an application to court, to prove the validity of a will and the executor’s power to act pursuant to that will.

Not all estate assets require probate before they can be dealt with by the executor. For example, personal effects and shares of private corporations do not require probate. As well, some assets – such as life insurance and registered accounts – may pass outside of the estate if there is a direct beneficiary designation, thereby bypassing the need for probate

A quick note on terminology

While we use the general term “probate” as a shorthand way of referring to the process described above, you may hear some variations on this. Grant of Probate, Letters Probate, Letters of Administration or, in Ontario, Certificate of Appointment of Estate Trustee, all refer to the same process of obtaining probate.

Probate fees

While all jurisdictions in Canada impose some type of fee for an application for probate, the amount of these fees varies widely. Some jurisdictions’ fees are similar to a tax and are charged as a percentage of the estate. Other jurisdictions charge a flat, nominal fee.

The table below summarizes these fees:

Avoiding probate fees

• Is probate a problem?

  Depending on where you reside, probate fees may be quite small, regardless of the size of the estate. As such, avoiding probate fees may not be a major concern.

  Some individuals may want to avoid probate for other reasons. First, the process itself can take a long time, causing delay in the estate administration. There may be other fees involved, such as lawyer fees relating to preparation of the probate application. In some areas, it may be common practice for lawyers to charge a percentage of the estate to file for probate, which can significantly add to the cost for larger estates. In addition, as part of the probate process, the testator’s will becomes public record. Some individuals may prefer to keep their estate distribution private, even on death.

• Beneficiary designations

  One way to avoid probate is to have one or more individuals, or entities, as direct beneficiaries wherever possible, such as on registered accounts and life insurance products.

  Importantly, having a direct beneficiary will not avoid any tax implications attached to registered accounts, such as RRSP or RRIF accounts, which are fully taxable as income on death if not transferred to a married or common law spouse. This can also cause an imbalance, or estate administration issues, as the taxes relating to these accounts will come first out of other estate assets, not out of the registered account itself.

  There are additional concerns to be aware of with beneficiary designations. Beneficiary designations made directly on financial institutions’ forms do not allow for certain flexibility. For example, while an alternate beneficiary can be named if all named beneficiaries pass, these forms do not allow for giftovers where one named beneficiary has passed. As well, it can be difficult to pass funds to minor or disabled beneficiaries by way of a direct beneficiary designation because it is better to direct the funds into a trust for the beneficiary rather than directly to the beneficiary.

• Secondary wills

  In some provinces, primary and secondary wills are used to avoid probate fees on the value of assets that do not require probate before being administered. This is a common practice in Ontario and B.C. for clients who have privately held shares or certain other non-probatable assets. In Ontario, it is common to name the same executor on both the primary and the secondary will. In B.C., however, two distinct executors must be named, which adds some complexity to the estate administration process. Other provinces, such as Manitoba and Nova Scotia, do not permit this splitting of a person’s estate into a primary and secondary estate.

• Jointly held assets

  All provinces, other than Quebec, permit individuals to hold assets jointly with one or more other individuals with rights of survivorship. This means that where one of the owners dies, the asset passes directly to the remaining owner(s) and does not form part of the deceased’s estate. Often, spouses will hold assets such as bank accounts, investments, and real estate jointly with right of survivorship. When one spouse passes away, the surviving spouse reregisters the asset in their sole name.

  Individuals sometimes choose to place assets into joint names, with right of survivorship, with one or more adult children as a way of avoiding probate when they die. However, there are some potential pitfalls with this self-help probate avoidance technique:

  1. There is a presumption in law that the funds still belong to the deceased parent’s estate. There has been much litigation between joint owners and other potential beneficiaries of a deceased’s estate over these types of assets.
  2. Placing an asset into joint names may have adverse tax consequences. There may be a deemed disposition, unintentionally triggering taxes. As well, if a primary residence is placed into joint names, part of the principal residence capital gains exemption may be lost.
  3. An asset placed into joint names may be open to claims by the new joint owner’s creditors or their spouse on a marital breakdown.
  4. The original owner may later want to sell, dispose of, or encumber the asset, and the new joint owner may prohibit such actions.

• Gifting

  Individuals may choose to gift during their lifetime to remove assets from their estate and therefore from probate fees. This is a reasonable approach where the individual no longer needs this asset. It is best not to gift any assets that the individual may still want to use or have access to in the future. As well, gifts made during lifetime to one or more beneficiaries may need to be equalized through the estate plan where other beneficiaries did not receive any early gifts

• Use of trust and life insurance

  Use of inter vivos trusts, such as alter ego or joint partner trusts, may also serve to avoid probate. With these planning techniques, an individual sets up and moves assets into a trust, which continues for the lifetime of that individual. On death, the trust itself dictates where the assets go. Because assets are held in the trust and not by the deceased, they do not form part of the deceased’s estate.

  Another more advanced technique is the purchase of permanent life insurance where an individual has excess funds during their lifetime. These funds can be used to pay the life insurance premium; when the individual dies, the life insurance can then be paid out directly to named beneficiaries and avoid both taxes and probate fees on the value of the life insurance.

• A holistic approach

  Estate and probate planning are very complex areas and should not be conducted on an ad hoc basis. Self-help probate avoidance techniques have been responsible for adverse estate outcomes and rising litigation. Be sure to work with estate professionals who can assist you in crafting a unique, robust estate plan that suits your particular goals. If you have questions about your estate, speak to your advisor.

A note about Quebec

In Quebec, if you have a notarial will executed before a Quebec notary, there is no need for probate. Due to this fact, this type of will is the most popular in the province. Avoiding probate expedites the estate settlement process and avoids the costs surrounding the application and court filings. Probate is still required should you execute a will before witnesses or a holograph (handwritten) will.

Raymond James Ltd.’s trust services are offered by Solus Trust Company (“STC”). STC is an affiliate of Raymond James Ltd. and provides trust services across Canada. STC is not a Member of the Canadian Investor Protection Fund.