PROBATE - WHAT IS IT?

The word “probate” has different meanings in different contexts. In a narrow sense, it means the proof of a will. Before financial institutions and others will accept the directions in a will to transfer a significant asset of a deceased person that they are holding, they require proof that the will shown to them is the authentic will. The process of proving a will is called probate. The court where this proof is made is the Probate Court. More generally, “probate” is often used to describe the process of administering the estate of a deceased person under the supervision of the Probate Court.

WHY AVOID IT?

First, there is the cost. The costs are higher now than they used to be, for two reasons. Probate fees, now recognized as a tax, are $820 if an estate is valued between $50,000 and $100,000, and $820 plus 1.385% of any amount over $100,000. An estate of $1,000,000 will attract a probate tax of $13,285. (N.B. In the province of Nova Scotia; probate fees vary from province to province)

Also, beginning in October 2001, you must complete the probate process, even if the only reason you need probate is to transfer an asset. Under the old probate laws in effect before October 2001, a person could normally abandon the process once assets were transferred. The new probate law requires all estates to follow a series of steps in the probate process. These extra steps will usually increase costs.

Second, there is the loss of privacy. All documents filed at the Probate Court are open to the public, including wills and inventories listing the details of assets comprising estates. It is common to see information filed at Probate Court reported in the press. Most of us value our privacy, and go to some lengths to protect it, but that is lost at our death if probate is required.

Third, there are the built-in delays of the probate process. An estate, once opened, must be advertised in a government publication called the Royal Gazette, which must run weekly for six months. This is primarily for the protection of creditors. Even if you know that all the bills have been paid, you cannot avoid this delay.

HOW CAN PROBATE BE AVOIDED?

The key to avoiding probate for your estate is to make sure that all of your assets are owned in such a way as not to require probate. If all of your assets, or at least all of the significant ones, are owned in a manner that will not require probate to transfer them after your death, then probate is optional, not mandatory. If it is optional, most will decide to skip it.

WHY WOULD SOMEONE WANT PROBATE?

In some cases, those benefitting from an estate will want the supervision of the Probate Court. For example, if there is doubt whether the will that is found is the last one, or doubt whether the deceased made a valid will, then the Probate Court can resolve those doubts. If the deceased left many debts, the probate process can be very helpful in seeing that the creditors are identified and paid fairly. If there are complaints that those administering the estate are not acting fairly, the Probate Court can hear those complaints and take the necessary action. These are some of the situations in which the probate process serves a very important function.

But in most cases, the benefits of the probate process are not relevant or useful. The widow, for example, who is the sole executor of her husband’s estate and who has been left the entire estate, will see no benefit in paying the probate tax, or stepping throught the entire process. She is the only person interested in the estate. The built-in delays and protections serve no purpose and only get in her way.

PROBATE AVOIDANCE FOR SPOUSES OR COMMON-LAW PARTNERS

Probate avoidance for spouses and common-law partners is relatively easy and is widely understood and practised. To simplify the discussion, we will refer to spouses only, but the rules now apply equally to common-law partners who have registered their relationship.

There are four methods of arranging your assets so that your spouse will not have to probate your estate at your death.

First, you may give assets to your spouse. For example, if a husband learns that he has a terminal illness, he can transfer most assets to his wife. The main exceptions are registered plans like RRSPs or RRIFs, but they have their own transfer method available.

Second, you may transfer assets to your spouse and yourself as joint owners, with a right of survivorship. This means that when one joint owner dies, the surviving joint owner owns the asset automatically, without anything further required to be done. This is widely adopted for real estate and bank accounts, but can be used for many other assets, including brokerage accounts, mutual funds, term deposits, and so forth.

Third, you may designate your spouse as the beneficiary of life insurance policies or registered plans like RRSPs or RRIFs.

Fourth, you may transfer assets to a trust for your spouse. If you are over 65, you may also transfer assets to a trust for you and your spouse.

If you and your spouse use one or other of these methods for all your significant assets, then there should be no need for probate when the first spouse dies.
If you overlook an asset, then probate will only be required for the overlooked asset. At least you will save the probate tax that would have been charged on the other assets.

PROBATE AVOIDANCE BETWEEN GENERATIONS OR WITH OTHERS

All of the same methods are available if you wish to benefit someone other than your spouse. For example, if you are a widow, and you wish to leave your assets equally to your children, who are all adults, you can use the same methods. You could give assets to children, or make assets jointly owned with children, or name children as beneficiaries, or give assets to a trust for your children.
However, using any of these methods could have serious negative consequences for you and those you wish to benefit. First, there may be undesirable income tax consequences: you may trigger capital gains unexpectedly or you may find that the income from the assets transferred must be reported differently in the future. Second, you may lose control of your assets. Third, your assets may be placed at risk if the others to whom you give your assets become insolvent or bankrupt, or they become subject to claims such as matrimonial property claims on marriage breakdown. Fourth, if you transfer your assets to more than one person as joint owners, the death of one of them could result in your assets being distributed in ways that you did not intend.

To sum up, you must exercise care in using these methods when you want to benefit anyone other than your spouse.
If you are interested in avoiding probate when benefitting others, Part II of this article discusses additional techniques that can overcome these negative consequences.

A FINAL WORD…

If you are interested in pursuing any of these planning techniques, one of our estate planning lawyers would be pleased to assist you.

[To contact Richard S. Niedermayer at the Atlantic Canada offices of Cox Hanson O'Reilly Matheson click here

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