Probate Tax by akgame


									                                                                                         Robins, Appleby & Taub LLP


                                                                                                                   Spring 2006

Probate Tax
                                                                   Since a Will only takes effect upon death, individuals may
                                                                   re-write their Wills many times over the course of their
                                                                   lifetime. Usually, each Will begins with a provision that

What you need to know                                              revokes priors Wills. The ever-present possibility of a given
                                                                   Will not being the last Will leads to issues of liability for

for your estate plan                                               the individuals claiming to be the executors and for third-
                                                                   parties dealing with the estate’s assets. Therefore, in certain
                                                                   situations, there is a need to have a court confirm the
By Elizabeth Creates
                                                                   validity of the Will and the appointment of the executors
                                                                   therein prior to the administration of the estate.
One of the essential elements of any Will is the appointment
of an executor or executors (also called “estate trustees”).       A. What is probate?
Executors derive their authority from the Will and are in          In Ontario, probate is the process whereby the Ontario
charge of the administration of the estate of the deceased         Superior Court of Justice (the “Court”) certifies the
individual. Such administration involves making an                 validity of a deceased’s Will and confirms the powers that
inventory of the estate’s assets, ensuring that the estate’s       the Will grants to the executors. This is evidenced by the
liabilities are satisfied, and dealing with the remaining           issuance of a “Certificate of Appointment of Estate Trustee
assets of the estate in accordance with the provisions of          with a Will”. Although the certificate itself is no longer
the Will.

Robins, Appleby & Taub LLP                                     1                                                    (416) 360-3332
Elizabeth Creates TAX & ESTATE PLANNING REPORT Probate Tax                                                            SPRING 2006

called “Letters Probate”, the procedure for obtaining the          •   assets held by multiple owners in joint tenancy with a
certificate is still commonly referred to as “probating the             right of survivorship.
Will”. Probate application documents include the Will
                                                                   •   real estate situated outside of Ontario (e.g. a vacation
and information on the value of the assets governed by
                                                                       home in Florida).
the Will. Upon being filed with the court, such documents
become public documents.                                           For probate tax calculation purposes, the value of real
                                                                   estate held by the deceased is reduced by the amount of
Certain third-parties (e.g. banks, land titles office,
                                                                   any mortgage thereon, but the aggregate value of estate
etc.) require that a Will be probated prior to providing
                                                                   assets will not be reduced by other estate liabilities.
access to the assets of a deceased individual or prior to
authorizing the transfer of such assets. However, various          Probate tax itself is calculated in two tranches: $5 for each
assets typically do not require probate in order for the           $1,000 (or part thereof) on the first $50,000, and then $15
authority of the executors to be accepted (e.g. shares of a        for each $1,000 (or part thereof) on any excess. Therefore,
closely-held private corporation, an interest in a closely-        the probate tax on a $1 million estate will be $14,500 (i.e.
held partnership, assets held in trust for the benefit of the       approximately 1.5%).
individual, personal articles, etc.).
                                                                   C. Examples of methods to reduce or
                                                                   eliminate probate tax
                                                                   Probate planning should be undertaken in conjunction
                                                                   with the drafting of a Will. The process requires an analysis
                                                                   of an individual’s assets and liabilities, as well as his or her
                                                                   personal circumstances. Therefore, it is recommended
                                                                   that a tax and estates professional be consulted.

                                                                   The following are examples of methods that can be used
                                                                   to reduce or eliminate probate tax. Please note that non-
                                                                   probate tax issues (e.g. financial needs, the desire to control
                                                                   certain assets, income tax, etc.) should also be considered
                                                                   prior to implementing any such methods.
     If done correctly, probate tax planning can
                                                                   (a) Designating a beneficiary in a life insurance policy,
     result in substantial savings to a deceased
     individual’s estate.                                          RRSP/RRIF, or pension plan
                                                                   Probate tax can only apply to estate assets. By designating
                                                                   a beneficiary (other than the estate) of a life insurance
B. How are Ontario probate taxes calculated?
                                                                   policy, RRSP/RRIF or pension plan, the funds will pass
Pursuant to the Estate Administration Tax Act, 1998, the
                                                                   directly to the designated beneficiary rather than indirectly
Ontario government charges a tax (commonly called
                                                                   through the estate. As such, probate tax will not apply to
“probate tax” or “estate administration tax”) for probating
                                                                   such assets.
a Will. Probate tax is based on the value of the assets
(including cash) governed by the Will in question, subject         (b) Multiple Wills
to certain qualifications.                                          As mentioned previously, not all assets require probate.
                                                                   However, if a Will is probated, the probate tax will be
The following are examples of assets that are excluded
                                                                   based on the value of all the assets governed by that Will,
from a probate tax calculation:
                                                                   regardless of some of those assets not having required
•   life insurance proceeds and retirement plans (e.g.             probate. In other words, probate is an all or nothing
    RRSP, pension plans, etc.) payable to a named benefi-           proposition for the Will in question.

Robins, Appleby & Taub LLP                                     2                                                    (416) 360-3332
Elizabeth Creates TAX & ESTATE PLANNING REPORT Probate Tax                                                              SPRING 2006

If the value of the assets that do not require probate (e.g.          the beneficial owner and the beneficial owner’s estate (if
shares in the capital of a closely-held private corporation,          the beneficial owner is an individual).
etc.) will be substantial upon death, it may be advantageous
                                                                      Typically, a bare trustee is a corporation. The shares of a
to isolate those assets in a Secondary Will and thereby
                                                                      bare trustee corporation can be owned by the beneficial
exclude them from the ambit of the Primary Will. In this
                                                                      owner of the asset. Probate tax on the value of real estate
manner, the assets that may require probate would be
                                                                      and marketable securities can be avoided by transferring
governed by the Primary Will and the other assets would
                                                                      legal title to such assets to a bare trustee corporation prior
be governed by the Secondary Will. If the Primary Will is
                                                                      to the death of the beneficial owner.
probated, probate tax would only be based on the value
of the assets in the Primary Will. Since the two Wills                If structured properly, neither income tax nor land transfer
would need to operate together, care must be taken for the            tax (if the asset is real estate) should be triggered on the
Secondary Will not to revoke the Primary Will.                        transfer of legal title to a bare trustee because such taxes
                                                                      generally apply to transfers of beneficial title and not to
(c) Joint ownership of assets with a right of survivorship
                                                                      transfers of legal title alone.
When an asset is owned by two people as joint tenants with
a right of survivorship, the survivor will obtain full title to
the asset upon the first to die. This occurs automatically
by operation of law and avoids the asset having to pass
through the estate of the deceased joint owner. An asset
may be owned jointly with a right of survivorship by two
or more persons.

Without proper planning, the transfer of an asset into joint
ownership may inadvertently cause adverse consequences,
such as:

•   the triggering of income tax liabilities;

•   the loss of individual control over the asset prior to               A tax and estates specialist should be consulted
    death; and                                                           prior to implementing a probate tax plan so
                                                                         that unintentional adverse consequences can be
•   the loss of the ability to transfer the asset to selected            avoided.
    beneficiaries in a Will because the asset is not part of
    the deceased’s estate.                                            The bare trustee strategy can be coupled with the multiple
                                                                      Will strategy by having the Secondary Will (governing the
 (d) Transferring legal title to a bare trustee
                                                                      assets that will not be subject to probate tax) govern assets
This technique involves separating legal title from
                                                                      held in trust for the benefit of the individual.
beneficial title as regards an asset. The legal owner of an
asset is the person who is registered on title. The beneficial         Alternatively, the bare trustee strategy can be combined
owner is the person who has the right to deal with the                with the joint ownership strategy by having the new joint
asset. Usually, the legal owner and the beneficial owner are           owner be a bare trustee. Prior to becoming a joint owner,
the same person. However, if the legal owner merely holds             the person would need to execute a Declaration of Trust
legal title to the asset on behalf of the beneficial owner and         stating that his or her interest in the asset will be held by
has no discretion over how the asset can be dealt with, the           him or her in trust for the benefit of the beneficial owner
legal owner is called a “bare trustee”. As evidence of the            and the beneficial owner’s estate. This enables the beneficial
bare trustee relationship between the parties, the bare               owner to continue to control the asset, and avoids any
trustee may execute a “Declaration of Trust” in favour of

Robins, Appleby & Taub LLP                                        3                                                   (416) 360-3332
Elizabeth Creates TAX & ESTATE PLANNING REPORT Probate Tax                                                             SPRING 2006

immediate income tax consequences on the transfer to                 Will. However, since the assets are trust assets rather than
joint ownership. Upon the death of the beneficial owner,              estate assets, probate tax will not apply. An alter ego trust
the bare trustee will become the sole legal owner of the             or joint partner trust may also, in certain circumstances,
asset and the asset will be dealt with in accordance with            provide creditor protection with respect to the assets
the terms of the deceased beneficial owner’s Will. For this           transferred to the trust.
reason, a copy of the Declaration of Trust should be stored
                                                                     While alter ego trusts and joint partner trusts can
with the beneficial owner’s Will.
                                                                     provide probate tax savings and other advantages, there
 (e) Making gifts prior to death                                     are significant drawbacks to using such a strategy. For
By making a gift prior to death, the gifted asset will not           example, the settlor will no longer have absolute control
form part of the deceased’s estate and will not be subject           over the trust’s assets because other beneficiaries have a
to probate tax. The individual making the gift is called a           contingent interest in such assets. Also, upon the death of
“donor”.                                                             the settlor, the trust will be treated as an inter vivos trust
                                                                     and the highest marginal income tax rates will apply to it.
By making the gift, the donor forgoes any control he or
                                                                     If the same trust had been established under the settlor’s
she had over the gifted asset. Also, the gift transaction
                                                                     Will, it would have been treated as a testamentary trust
itself may lead to tax consequences to the donor that
                                                                     and graduated income tax rates would have applied to it.
are immediate (e.g. capital gains tax from the deemed
disposition) and long-term (e.g. attribution to the donor            D. Conclusion
of income and/or capital gains generated from the gifted             Probate planning is a complex undertaking that may
asset).                                                              have tax and other ramifications. Therefore, a full analysis
                                                                     of the matters at issue must be performed by a tax and
( f) Establishing an alter ego trust or joint partner trust
                                                                     estates professional prior to implementing any individual
An alter ego trust can be established by an individual
                                                                     strategy. Otherwise, a probate tax savings may potentially
(called a “settlor”) who is at least 65 years old for his or
                                                                     be outweighed by much higher financial and non-financial
her own benefit. Provided that the requirements for an
alter ego trust set out in the Income Tax Act are fulfilled,
the transfer of assets by the settlor to the trust will not
constitute a “disposition” and will occur on a tax deferred
basis. One of the requirements of an alter ego trust is that,
during the lifetime of the settlor, he or she must be entitled
to all of the income of the trust and no person other than
the settlor can obtain the use of the income or capital of           The information contained in this article is for general
the trust. A joint spousal trust is similar to an alter ego          informational purposes only and should not be relied
trust, but it also allows the spouse of the settlor to be            upon as legal advice. Elizabeth Creates is a lawyer who
entitled to income and capital of the trust during such              practices in the area of tax and estates. Further particulars
spouse’s lifetime.                                                   on the matters discussed, their implications and suggested
                                                                     courses of action can be obtained from Elizabeth Creates
Upon the settlor’s death (or, in the case of a joint partner
                                                                     at (416) 360-3332 or
trust, upon the death of the surviving spouse), there will
be a deemed disposition of the trust’s assets which may                 Robins, Appleby & Taub LLP
result in capital gains tax in the same manner as if the                provides expertise in all areas of business law
settlor had retained the assets in his or her estate. The               including commercial real estate, banking and
trust agreement will govern how the trust’s after-tax assets            insolvency law, tax law and estate planning,
will then be dealt with. In this respect, an alter ego trust            commercial litigation and corporate law.
or joint spousal trust operates in a manner similar to a

Robins, Appleby & Taub LLP                                       4                                                  (416) 360-3332

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