Avoiding or minimizing probate taxes
Probate is a legal process that confirms two things: the
appointment of the executor* and the validity of the Will.
After your death, your executor and your lawyer submit your
Will and an inventory of your assets to the provincial court.
*In the province of Quebec, an ‘executor’
is called a ‘liquidator’, and in the province
of Ontario, an ‘estate trustee’.
When the court accepts these documents, it issues what are
called “letters probate”, that verify the Will
is valid and confirm the appointment of the executor.
Before the letters probate is issued however, the executor
must pay a probate tax. This tax is based on the total value
of the assets in the estate. The rate varies between provinces
and can be significant. In Ontario for instance, a $1,000,000
estate would pay $14,500 in what Ontario calls "estate
administration tax."
The good news is that you can structure ownership of your
assets in ways that either avoid or minimize probate taxes.
Essentially the strategy is to create an ownership structure
in which the asset does not become part of your estate when
you die.
For example, if you hold assets such as your home or cottage
in “joint tenancy with right of survivorship”,
upon death, the asset is passed to the surviving individual.
It therefore remains outside of the estate and there is no
probate.
You can also avoid probate by naming a specific beneficiary
to receive certain assets such as registered accounts. When
you die, the asset passes directly to the beneficiary, remaining
outside the estate and avoiding probate. Proceeds of a life
insurance policy are treated the same way.
Another way to keep assets outside of the estate is to create
a trust. Once the trust is created, ownership of the assets
within it is transferred to the beneficiary and they are not
considered part of the estate.
There are other strategies, but there can be legal and/or
accounting fees involved. Just be sure that the costs of planning,
implementing and administering any strategy does not outweigh
the cost of probate.
Important information about our financial planning services can be found at the bottom of our
homepage.
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