Knowing What Works Best

Do you remember having a simple conversation over a cup of coffee and being asked “Did you know”?  By chance, did you catch yourself thinking about your own situation?  The phrase, “A little knowledge is a dangerous thing”, can spook people into doing the wrong thing.  When the conversation lands on the cost of settling an estate upon death, a little knowledge will NOT do.   

    

When the term, “probate”, comes up in those conversations, a tiny spark ignites and creates a fire.  Most people desire nothing more than to extinguish the flames caused by probate fees which threaten to torch their estate’s wealth and short-change their beneficiaries.   

But what if...probate costs are not the enemy? What if…the process of probate is intended to get your property into the hands of your intended beneficiary?  Then, the cost might be worth every cent to fulfill your wishes!   

TEST VALIDITY

When you die, the first question generally asked by anyone and everyone, “Did he/she have a will?”  Once confirmed, then the instruction which follows is, “The will needs to be probated.”  

The word probate sounds mysterious, doesn’t it? The formal definition for the noun “probate” refers to “the official proving of a will” and the verb, “establish the validity of a will.”  The term originates from the Latin word “probare” which means “to test, prove” and probatum, “something proved”.  These two combine to create “probate”.  

This makes sense!  The courts test the last Will and Testament of a deceased person to prove its validity and confirm the named executor has the authority to oversee the estate of the deceased.

    

When the court stamps their seal of approval, your family and other third parties (banks, land titles office, brokerage firms) know with certainty the will has been certified and the executor officially has the legal right to distribute or transfer the assets to the beneficiaries as named in your will. 

The application for probate involves the preparation of specific documents.  The website for the Courts of Saskatchewan (under Wills and Estates) provides a list of the required forms.  Generally, most people would seek a lawyer’s assistance in the preparation; however, it’s not a requirement. Most executors, however, discover the task of completing the appropriate forms to be time-consuming and choose to work alongside with the lawyer on the deceased’s estate. 

Once the formality is complete, the courts issue an official document referred to as “Letters Probate”. This important document gives the green light to the executor, appropriate institutions and agencies to follow through with your wishes.  

DETERMINE THE COST

Every estate is not required to go through the probate process.  Specific circumstances will warrant the need for probate such as: the value and types of the assets held in the estate, whether the deceased died without a will, or whether the estate faces legal actions.

In some cases, when all the assets bypass the estate (pass outside the will) probate will not be necessary. Assets held jointly with rights of survivorship are transferred to the surviving joint owner upon the presentation of a notarized death certificate. Likewise, when a designation of beneficiary is named on registered retirement savings and pension plans, life insurance policies, and Tax-Free Savings Accounts, these assets also pass outside the will and do not form part of the deceased’s estate.  Only those assets owned solely by the deceased accumulate in the estate and are distributed according to the instructions in the will.  An executor determines which assets are held inside the will when they complete an inventory list.               

   

The part of the probate process which upsets most people is the associated fees.  The fees are not standardized across Canada rather every province has a different fee structure for administrating probate. Although the term “fee” is used, most see this as a tax fixed by the provincial government and would rather choose to avoid paying the so-called “tax”.  In Saskatchewan, the probate fee is a flat charge of $7 per $1,000 of assets; other provinces impose probate fees at various increments as the value of the estate increases.  Keep in mind, the lawyer’s costs, associated with the settlement of the estate, are in addition to the probate fees. 

PLAN FOR THE RIGHT REASONS

Your will should be designed to satisfy your wishes.  Arranging for all your assets to pass outside your will might not be in the best interest of your beneficiaries or be distributed the way you would hope. 

The concern isn’t when your accounts and real estate are held jointly with your spouse or when your spouse is designated as your beneficiary on registered retirement or pension plans and life insurance. The concern is when the person is anyone other than your spouse, most likely your children.  (The situation becomes complicated when you make your property joint with a second spouse and your original intent is to leave property to the children from your first marriage. You can’t give away something you don’t own.)    

Many factors attribute to the overall picture.  Your main focus may be to avoid probate fees.  However, your strategy without legal and tax advice could prove to be fatal.  Watch closely if any flags wave, “Proceed with Caution”.

Concerns raised in a previous blog, Joint Tenancy as an Estate Planning Tool,  are still the same today.  When you opt to include someone on your investment accounts or title of real estate property, you give up full control and now share the ownership of these assets with the another person. The drawback with joint names on property is you would require the other’s consent if you decide to sell.  The downside--they may be reluctant to oblige.   Another concern is the possible tax implications. In the eyes of Canada Revenue Agency (CRA), you are disposing of half of your interest.  The strategy may trigger a tax liability in the same way as if you sold your interest to any outsider.   Always check with your accountant or lawyer to ensure your strategy to minimize the probate fees on your estate is justifiable and in your best interest.

Cash held in an estate could be used to cover the cost of the probate fees and final estate expenses. A life insurance policy could be used for this purpose.  Literally, the insurance acts as a “life saver” in circumstances when a sizeable estate is owned solely by the surviving spouse and the number of beneficiaries is significant. The assets are able to flow into the estate and the death benefit from a life insurance policy can help cover the final costs. Once all the expenses are paid, when the dust settles, then the assets and remainder of the estate can be shared as outlined in the will instructions.  This creates a more equitable distribution among the beneficiaries.   

INFORM YOURSELF 

At the beginning, I mentioned, “A little knowledge is a dangerous thing”.  BUT I also believe knowledge is power.  A wealth of information is available about probate.  An entire chapter has been dedicated to this subject in Sandra E. Foster’s book, You Can’t Take It with You.  Another valuable resource is the website of The Public Legal Education Association of Saskatchewan (PLEA).   They contribute extensive details on Wills and Estates. Our important takeaway from all this knowledge is to fully grasp how this applies to our unique circumstances. 

Although many would prefer to reduce the cost incurred with the settlement of their estate, this may not be possible.  Our desire should rest on making the right decisions.  Our sincere intentions guide us to search for suitable strategies.  Probate and legal fees may be necessary to appropriately execute our wishes and ensure our family members are treated equitable.  Walking through the many possibilities with a professional advisor is the ideal course of action to achieve the best outcome.  For our benefit, the call to action is to be informed.   

Joint Tenancy as an Estate Planning Tool – Pros and Cons

Del Elgersma is a lawyer and founding partner of Beacon Law Centre with three offices, one in Victoria (Royal Oak), one in Sidney and another in Brentwood Bay, British Columbia.  Del has graciously agreed to share his publication, Joint Tenancy as an Estate Planning Tool.  As Del explains, you should weigh the pros and cons before choosing to transfer assets in joint names.  Estate planning is complex.  Consulting an estate planner and lawyer to seek advice and a clear direction is advisable. Additional publications may be found at Beacon Law Centre.

 

 

Joint Tenancy as an Estate Planning Tool – Pros and Cons

by Del Elgersma

Estate planning means different things to different people, but most people agree that some of the goals of estate planning include:

• Simplifying the administration of an estate

• Minimizing probate fees

• Ensuring that property passes to the intended person

One of the most common strategies used to achieve these goals is to own property with another person in a joint tenancy.

 

Joint tenancy or tenancy in common

Property owned by more than one person must be owned in one of two ways: joint tenancy or tenancy in common. In practical terms, the chief distinction between joint tenancy and tenancy in common is the right of survivorship. Only joint tenants enjoy right of survivorship.

If you own property with another person as tenants in common, on your death your interest in the property becomes part of your estate to be passed on according to your will. If you own property with another person as joint tenants, on your death your interest in the property passes to remaining joint tenant(s) by right of survivorship. It does not form part of your estate.

The law presumes that an asset (other than land) held in two or more names is owned as a joint tenancy, unless there is an indication that the owners own it in shares. So, for example, household goods, vehicles, bank accounts and investments owned by two or more persons will be presumed to be owned by them as joint tenants, unless their respective shares of the assets are specified or there is a statement that the asset is held by the owners as tenants in common.

However, in the case of land the common law presumption of joint tenancy has been altered by statute, so that land owned by two or more persons is presumed to be owned by them as tenants in common unless the title expressly states that they are joint tenants.

 

Right of Survivorship

Because of the right of survivorship, a joint tenancy can meet the estate planning goals of simplifying the administration of an estate, minimizing probate fees and ensuring that property passes to the intended person. It is a strategy used by the majority of married couples, who own their major assets, such as their home, as joint tenants.

The right of survivorship ensures that when the first spouse dies, these assets pass to the surviving spouse without being subject to the delays and expense of an application for probate (with a little extra planning, it is often possible to avoid probate altogether on the death of the first spouse). The right of survivorship also ensures that ownership of the assets will not be affected by claims under the Wills Variation Act, if there is a will, or by the rules for intestate distribution under the Estate Administration Act, if there is no will.

 

Beware of the Consequences

While joint tenancy is most common between spouses, it is becoming increasingly common between parents and children. The purpose is the same – to simplify administration of the parents’ estates and to minimize probate fees. Often the joint tenancy is created after the death of one of the parents. However, this can result in some unintended and undesirable consequences. Consider the example of a parent who has transferred her assets into a joint tenancy with one of her adult children:

Loss of control

The parent cannot later cancel the transfer if she changes her mind. As well, in the case of land, she will not be able to sell or mortgage the land unless the child also signs.

Income tax

The transfer is a disposition for income tax purposes. The 50% interest in the property transferred to the child is deemed to have been sold at its fair market value and, unless the asset is the parent’s principal residence, a portion of any capital gains will be added to the parent’s income. This could result in the parent having to pay tax even though she received no payment from the child.

In addition, one half of any future capital gains will accrue to the child. If the property is the parent’s principal residence and the child lives elsewhere, the principal residence exemption will be lost for the child’s share of any future increase in value of the home.

Property transfer tax (Applicable in certain provinces)

In the case of land, property transfer tax will be payable at the time of transfer, although there may be an exemption available if the property is the principal residence of either the parent or the child.

Exposure to creditors

The child’s interest in the property will be subject to claims by the child’s creditors. If the child is married and the property is used for a family purpose, it could be subject to claims by the child’s spouse if there is a breakdown of the child’s marriage.

Death

The child may pass away before the parent, negating the purpose of the joint tenancy. If other children were also on title with the parent as joint tenants, on the death of the parent the asset would pass only to the surviving children, and the family of the deceased child would receive nothing.

 

Resulting trust

The law presumes that a joint tenant who contributed nothing toward the property holds his or her interest in trust for the contributing owner. An exception is the presumption of advancement (meaning a gift in advance of a person’s death). According to case law, the presumption of advancement applies to transfers of property from one spouse to both spouses, or from a parent to a child. However, the presumption can be rebutted. Accordingly, if the child has other siblings, they might claim that the child holds the property in trust for all of the children, while the child with title would claim that the right of survivorship applies. This could also arise if the joint tenancy resulted in property passing to children to the exclusion of a spouse, or to a spouse to the exclusion of children.

Some of the factors that may rebut the presumption of advancement and suggest that the child holds the property in trust for the parent’s estate include the following:

• the parent was the sole owner of the property prior to the transfer

• the property was controlled exclusively by the parent

• the child did not report any of the income from the property on the child’s income tax return

• the child did not receive or spend income generated from the property

• there is evidence that the joint tenancy was created simply to avoid probate fees or to provide immediate access to the parent’s funds after death (e.g., for funeral expenses).

Another unintended result can occur if spouses in a second marriage own property together as joint tenants, and each have children from previous relationships. On the death of the first spouse, the property will pass by right of survivorship to the surviving spouse. The spouses may have had wills that provided that the property would ultimately pass to the children of both spouses, on the death of the last of them. However, the surviving spouse can change his or her will so that the property goes only to that spouse’s children, and the children of the deceased spouse would receive nothing.

 

Put it in Writing

To avoid the possibility of a dispute between the child and any other spouse or other children of the parent, it is a good idea to put the parent’s intention into writing. If the transfer to joint tenancy would not result in capital gains tax, or the parent is prepared to pay the tax, the parent could sign a deed of gift to confirm that beneficial ownership in the property is transferred to the parent and child as joint tenants with right of survivorship. On the parent’s death, it would be difficult for other beneficiaries to argue that the child holds the property in trust for the parent’s estate.

Alternatively, the parent could require the child to sign a declaration of trust confirming that the child does not have beneficial ownership in the property, but simply holds his or her interest in trust for the parent. In addition to reducing the possibility of a dispute between the child and the other beneficiaries of the parent’s estate, the declaration provides the parent with a greater amount of control over the property, and may prevent the deemed disposition of the property for income tax purposes (because beneficial ownership of the property remains with the parent).

However, Canada Customs and Revenue Agency (“CCRA”, formerly Revenue Canada) has suggested that the existence of a declaration of trust will not, in and by itself, be conclusive evidence that beneficial ownership of the property has not changed. It would depend on all of the circumstances.

CCRA’s position is that if legal title to an asset is transferred from a parent to the parent and a child, but beneficial ownership remains with the parent (as confirmed by the declaration of trust and other circumstances), a disposition for income tax purposes has not occurred. Having said that, CCRA pointed out that in such a situation a true joint tenancy with the child would not exist and, in its opinion, the goal of reducing probate fees would not be achieved because the property would not pass to the child by right of survivorship.

Joint tenancy can be an effective part of an estate plan, but must be used with caution. If you have questions about creating a joint tenancy or other estate planning strategies, call us first for professional advice.

For a discussion of other strategies to avoid probate and probate fees, click here.