Table of Contents
- Why is probate required?
- Ways to Reduce Probate in Canada
- Designate beneficiary of your RRSPs, RRIFs, and TFSAs
- Incorporate Rights of Survivorship
- Spousal Rollover
- Make Your Child the Beneficial Owner
- Have two wills.
- Consider life insurance
- Living trust or revocable trust
- Transfer shares to your family members through a separate will.
- Give assets away
- Don’t let the “probate planning tail” wag the “estate tax planning dog.”
- Bottomline
You cannot avoid death, but you can avoid probate. Probate is the certification by a court that the will of a deceased person is genuine and that the person seeking permission to act as an executor of the will is legitimate.
It can cost the estate up to 1.5% of its net worth. Estate planning should consider this aspect as well. Do you want to avoid it? We will give you some tips about how to do it.
Why is probate required?
Probate is required when a will related to substantial wealth exists. Otherwise, a financial institute with which an executor must deal may demand probate documents before releasing funds or assets.
Ways to Reduce Probate in Canada
Following are some of the strategies you may try:
- Designate beneficiary of your RRSPs, RRIFs, and TFSAs
A registered retirement income fund (RRIF), Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are different accounts that you open with the Canadian Government or other institutions in which you deposit your money, and it stays there tax-free.
For these accounts, automatic beneficiary transfer is available from one person to another without probate. Hence, to avoid probate, you should name the beneficiaries who should inherit those accounts after your death.
Please note while beneficial ownership arrangements can be useful, simply naming a child as beneficial owner may not always guarantee probate avoidance or tax benefits without proper legal structures in place.
- Incorporate Rights of Survivorship
Survivorship is a term related to joint tenancy, which means that more than one person has an equal property ownership right. Hence, the survivor is the one who outlives the other partner. As a result, he becomes the owner of the property without probate.
These rights can help save on probate taxes.
- Spousal Rollover
A spouse has a share in the assets of his partner. During your estate planning, you can nominate your spouse as the beneficiary of your specific properties. Spousal rollovers enable a probate-free, tax-free property transfer from the deceased’s inheritance to the surviving spouse.
Note: Spousal rollovers apply primarily to transfers between spouses or common-law partners and defer capital gains tax but do not entirely eliminate it. Also, probate fees may still apply depending on the province unless the asset passes outside probate (e.g., by beneficiary designation).
- Make Your Child the Beneficial Owner
Beneficial ownership occurs when a person does not own a property but is entitled to income and proceeds from it.
In this case, the parent remains the actual owner and can sell the property whenever he wants to, though with the child’s consent, which he can quickly get.
After the death of the parent, the property will roll over to the child without taxes and probate. It can be another way to avoid probate on certain assets.
- Transfer assets to an alter-ego or joint spousal/partner trust.
The word alter ego means an “alternate self.”
An alter ego trust occurs when a person transfers assets to a trust and becomes the trustee. In this way, he is both the settlor and the trustee.
However, he makes his intended heirs the trust’s beneficiaries to avoid probate.
In this way, not only can he let them benefit from income, but also, the assets will roll over to them without probate after his demise.
- Have two wills.
Assets go into probate by a will. Some assets, such as the principal residence and assets entitled to spousal rollover, do not require probate.
Therefore, there shall be two wills: One for assets requiring probate and another for those not.
This way, the estate will minimize the taxes and the probate fees.
- Consider life insurance
Life insurance is an excellent means of offsetting tax liabilities. Otherwise, the estate can have huge liabilities regarding capital gains tax and others.
Insurance money is not only tax-free but also probate-free.
Attorneys and accountants recommend subscribing to an insurance plan because it provides extra care for the deceased’s loved ones.
Estate taxes in Canada can even require the sale of some assets to pay them. However, insurance money is an excellent way to avoid these liabilities.
- Living trust or revocable trust
A living or inter vivos trust is one a person creates during his life. So technically, having transferred his assets to the trust, he will no longer be the owner when he dies. Since probate is only for those assets that belonged to the deceased, no probate is mandatory in the case of such a trust.
- Transfer shares to your family members through a separate will.
If you own shares in a private company, you can make your family members shareholders or directors.
Thereupon, you should make a separate will for the shares.
Logically, your family members are likely to agree on the distribution of those assets; hence, they will roll over to them without needing probate.
- Give assets away.
Another way to minimize probate tax is to give away assets during your life. Be mindful not to give away those assets you may need for now, as such transactions are irrevocable.
Giving assets away will benefit you by seeing your children and spouse utilize the money.
You should give away this money using gifts and cash.
It allows you to minimize probate taxes because some assets have already gone and, two, because fewer assets mean less probate tax. Moreover, you get some tax credits for the gifts you give away, up to $10000 per year.
Therefore, span those gift transactions over some years to get the maximum waiver in terms of taxes.
- Don't let the “probate planning tail" wag the "estate tax planning dog."
Income tax planning is vital because such taxes sometimes amount to 40 or 50%. Probate tax, in comparison, is not small.
Therefore, ensure you do not end up paying more significant estate taxes to save probate tax.
Bottomline
Probate taxes are a significant issue for estate planners. You should consider them while you still have time so that you can leave the maximum to your heirs.