Estates, Probate Fees and Alter Ego Trusts
Article by Jonathan Wright. Click here for homepage.
Probate fees, at 1.4% of the value of an estate, can be a significant cost for the beneficiaries receiving assets under a will. The good news is that with some simple planning, they can be avoided.
Though labelled as a fee, probate fees in provinces like British Columbia and Ontario are actually not fees at all. They’re a tax on the value of a deceased’s property located in BC.
The motivation behind the fee is a government service. The probate registry ensures that the estate representative is the correct one, safeguards the estate from fraudulent claims and ensures that the estate is protected and that the assets are correctly distributed according to the wishes of the deceased.
However, as the Supreme Court of Canada has made clear, these “fees” don’t correspond to the amount of work necessary to accomplish the service. Take an estate with a home as the sole asset. If that home is worth $1,500,000, probate will cost $21,000. Double the value of the home and the fees are $42,000, without any extra work for the folks at the probate registry.
There are a number of ways to avoid probate, but this article focuses on joint partner and alter ego trusts—typically the best option available for avoiding probate on principal residences. If you or your spouse are older than 65, this option will be available to you.
Joint partner trusts are for couples and alter ego trusts for solo individuals. For these trusts, while the couple or individual are alive they can put property in and take property out of trust, and only they may access trust assets or funds.
Once the individual or the last spouse passes away, these properties then pass to the chosen beneficiaries. Since the assets don’t pass through the estate, the result is an avoidance of probate fees on these assets.
Joint partner and alter ego trusts
These trusts are more flexible than most. They can remain in existence up to and even beyond the lives of the individual and his or her spouse, perhaps in order to care for a young child or a disabled family member. Also, though tax is payable on the transfer of assets into most trusts, for these, assets roll in at cost, without tax owing.
Assets typically included are principal residences and vacation homes, but I often also see investment portfolios and shares of a family business put in trust. Given that the a person’s most valuable asset might be the shares of a family business, their inclusion is a significant benefit.
Since trusts can claim principal residences in respect of their beneficiaries, the principal residence exemption continues even while the home is in trust. In addition, property transfer tax on the transfer to the trust can typically be deferred by the use of a bare trust.
One last benefit is some protection from wills variation legislation. Especially if you are planning on leaving a child, spouse or other dependant out of your will, it is possible that a claimant could begin proceedings to obtain a part of your estate. Putting your assets in a joint partner or alter ego trust may reduce, if not eliminate, potential wills variation claims against your estate.
Is it right for you?
The value threshold when these trusts become worthwhile will vary from client to client. I typically recommend these trusts when estate assets are valued around $2,000,000. At this amount, savings to beneficiaries are in the amount of $28,000.
If you are interested in learning more about options for your estate, including joint partner and alter ego trusts, or wish to receive advice on this or other tax or trust matters, please do not hesitate to contact the author at email@example.com or 604.678.4459, or visit our website at wrightlegal.ca.