Using excluded property will efficient way to avoid probate fees

The Ontario government is cracking down on estate trustees who fail to declare accurately the full value of the assets of a deceased person. Starting January 1, 2015, estate representatives who receive a court certificate of appointment as estate trustee, commonly referred to as probate, will be required to file an estate information return with the Minister of Finance.

The return is due within 30 days after the estate representative receives a probate certificate from the court.

Court applications for probate only require the value of the estate assets to be provided in lump sum totals broken down into just two categories – real estate after deducting the amount of any outstanding mortgages, and personal property, which is everything else, including cash, stocks and investments.

In the new year, estate trustees will be required to file a detailed list of assets of the deceased, and a description of the value of each asset.

For real estate, the filing will require the full address of the property, the assessment roll number, full mortgage details, the property identifier number used for land registration purposes, and the property value.

If the asset is cash or investments, the ministry will require full details of the asset including account numbers, and the name and address of the institution holding the investments.

Other types of assets, such as a vehicle, furniture or collectibles, will also have to be itemized in the government filing.

An estate administration tax, often called a probate tax, is payable to the Ontario government on the value of the estate. The rate is $5 per thousand on the first $50,000, and $15 per thousand on the remainder.

Lawyers experienced in real estate and preparation of wills are able to advise clients on legitimate ways to avoid or reduce the tax payable.

In many cases, if a property was originally registered under the old Registry Act system and then administratively converted to the Land Titles system, it can be transferred or sold without obtaining probate and without paying the government tax.

Transferring title of a parent’s house into joint names with children is a common technique, but carries with it considerable risk if the child’s marriage breaks down, the child runs into credit problems, or the relationship with the parent deteriorates.

In addition, if land transferred into joint names with a child is an investment property or a cottage, serious tax consequences can arise as a result of the transfer.

An increasingly common way of avoiding probate tax is the use of multiple wills. A primary or general will is signed but restricted to certain assets where probate is required.

The general will deals with assets where probate is necessary for liquidation and distribution. Typically, this includes land historically in the Land Titles system, as well as term deposits, bank accounts, shares in public companies, GICs, and other investments. Estate administration tax is payable on all the assets included in a general will.

The other will, known as an excluded properties will, deals with assets which can be transferred without probate. The excluded properties will instructs the estate trustee not to apply for probate. As a result, payment of estate administration tax is not required.

Typically, the assets in this type of will are the shares of a private family company or business, and personal property including jewellery, furniture and art. In this scenario, shares in a family business are exempt from payment of the 1.5 per cent probate tax. There is no exemption from federal income and capital gains taxes.

The significant probate tax savings will usually far exceed the legal fees involved in preparing an additional, and fairly sophisticated, excluded properties will.

When dual wills are used, they must be carefully drafted to ensure that the secondary or excluded properties will does not revoke the general will. They must also make clear which assets are to be probated and which are not.

Estate planning and preparation of carefully drafted wills should always be handled by experienced professionals familiar with this area of law. There is really no such thing as a simple will.