ESTATE PLANING TOOLS – II
Previous post discussed wills, which are the basic tool and should be in place for all estates if for nothing else then to appoint the executor to avoid delays and additional applications to the court in order to deal with the estate. The will may be the only estate planning one might need, but sometimes it is beneficial to implement other strategies in addition to the will.
For example, real estate, irrelevant of its value, always requires probate. In certain circumstances it may be desirable to transfer real estate into joint tenancy with the right of survivorship during the life time of the testator so that when the testator dies, this real estate does not become a part of the estate and the joint tenant automatically becomes the sole owner. Other consequences of such transfer, including property transfer tax (the “PTT”), should be considered before it is implemented.
In order to prepare a will a person need:
- To choose an executor and an alternative executor (in case the first choice does not happen), a person who will be administering the will;
- To decide who the beneficiaries will be; and
- To decide what portion of the estate should go to which beneficiary.
A will must be witnessed by 2 persons, who are not beneficiaries under it. It is prudent to review the will at least every 5 years as circumstances change, as well as the law.
- Control over the distribution of the estate;
- Tax planning and optimization.
If a person dies intestate, his or her assets will be distributed according to the intestacy rules that were discussed in previous posts. Additionally, before that distribution can be done, beneficiaries will have to apply to court for letters of administration to appoint a person who will distribute the assets. By making a will a testator appoints an executor and ensures that his or her assets will go to intended recipients, in the amounts the testator thinks fit and at the times the testator wishes.
A person may have multiple wills in order to deal with different types of assets or assets located in a different jurisdictions. A will becomes an even more important documents if a testator has minor children as it allows to name guardians for the children and to determine how the estate will be administered to take care of them and when and in what shares it will be distributed to them.
Tax planning includes passing the assets to the spouse, putting certain assets in a separate wills, dealing with assets outside the will. Some of these techniques provide for tax deferral, some for probate avoidance and all of them aim at making the process easier for the heirs.
- Challenges by the immediate family members;
- Probate process;
- Probate fees;
- Public disclosure.
The Wills Variation Act of BC entitles children, spouses and common-law partners that are not happy with the distribution under the will to apply to court to challenge the distribution and demand for the “adequate provision”. The courts interpreted the “adequate provision” as not a narrow test concerning a minimal financial need but a more expansive test, which imposes a greater moral obligation on the testator. The Supreme Court of Canada stated that the courts are to make orders which are just in the specific circumstances and in light of the contemporary standards. Such power of the courts leads to a significant loss of testamentary freedom. Careful drafting will usually lessen the possibility of variation of the will by the courts. For example, if there is a reason someone normally entitled is going to be disinherited (such as abandonment of elderly parent or previous receipt of considerable gifts from the testator), these reasons should be set out in the will to show that the issue was considered and decision was not careless, unfounded or simply spiteful, but reasonable and as such should be upheld.
Though the WESA repealed the Wills Variation Act its provisions are now included into WESA in Part 4, Division 6 and will operate in the same way.
Generally, for administering an estate under the will, the will needs to be probated. Probate process is time consuming, costly and requires public disclosure. Probate tax in BC is levied under the Probate Fee Act, SBC 1999, Ch. 4 at a rate of 1.4% of the gross value of assets in excess of $50,000 situated in BC. The tax is payable on the gross value of the real and tangible personal property of the deceased that passes under the will that is probated regardless of the deceased ordinary residence. Intangible property is deemed to be situated in BC for probate tax purposes if the deceased was an ordinary resident in BC.
Probate tax may be avoided if the will is administered without probate. However, in order for that to happen:
- There must be complete certainty that:
- the will in question is the last will;
- the last will was validly executed;
- Each person with standing (spouses and children) must confirm that they will not bring a challenge;
- Each beneficiary under the will must provide indemnity to the executor for administering the will without probate;
- Any property that requires probate must be dealt with outside the will (real estate, for example). And for that to happen, it must be planned.
Assets outside the will
Examples of dealing with the assets outside the will include passing of the assets on the death of an individual pursuant to the terms of an inter vivos trust, right of survivorship under the joint tenancy, designation in a life insurance, RRSP or RRIF. Probate tax does not apply in these circumstances.
Transferring legal title to real estate prior to the owner’s death can reduce or eliminate probate tax. An asset can be transferred outright to an individual, corporation or a trust. Part of the interest may be transferred to create a joint tenancy. While making a decision on property transfers the property transfer tax (“PTT”) that applies at the time the legal ownership is transferred shall be considered. The PTT is paid at a rate of 1% on the first $200,000 of the fair market value, 2% on the fair market value between 200,000 and 2,000,000 and 3% on the value in excess of 2,000,000 (with some exceptions where tax rate remains at 2%). In addition there is also a special tax that applies when some residential property, depending on its geographical location, is transferred to a non-resident. Depending on the value of the property and other circumstances it may not be feasible to pay the PTT to avoid the probate tax at 1.4%.