The costliest piece of advice is the one usually obtained for free. This is the first thing that comes to mind when I hear “so and so told me to do this to save on probate.” Don’t get me wrong, probate fee planning is important for those in high-fee provinces like British Columbia (1.4%) and Nova Scotia (1.7%), but even if you reside in areas with nominal fees like Alberta ($525), planning can potentially speed up the transition of your estate. It can also have unintended pitfalls. If estate planning decisions are not made in the context of your overall bigger picture, what may seem like making it easy could end up causing unnecessary delays and burdens on your executor, not to mention the family strife.
A common yet problematic strategy involves transferring assets to joint ownership with children. This can lead to various issues:
- Increased income tax: Transferring property to joint ownership may trigger capital gains or affect principal residence exemptions.
- Tax on jointly held property: Children in higher tax brackets may face higher taxes on jointly held assets, and the Canada Revenue Agency (CRA) may assess taxes on income from such properties.
- Disrupted distribution plans: Improper planning can thwart intended wealth distribution among beneficiaries as illustrated in Barabara’s story below.
- Diminishing returns: For some estates, the costs of complex planning strategies may outweigh savings.
Consider the story of Barbara. She has two children, Nelly and Eldrick, who are co-executors of her estate. Barbara’s husband Jack passed away several years ago. Nelly, who has two children aged 12 and 15, and Eldrick encouraged Barbara to transfer her $800,000 investment account (or recreational property) into joint names with the right of survivorship to save on probate fees. Tragically, Nelly and Barbara were killed in an accident.
As the sole survivor, Eldrick inherits the entire investment account (property).Barbara also had a Registered Retirement Income Fund (RRIF) worth $260,000, with Nelly and Eldrick named as beneficiaries. Eldrick, as the sole surviving beneficiary, inherits the entire RRIF, without sharing either with Nelly’s children. The estate will also be responsible for the tax on the RRIF, reducing the inheritance for Nelly’s children.
Barbara’s estate now includes her home and furnishings valued at approximately $700,000 and $50,000 in bank savings. According to Barbara’s Will, the residue of the estate is to be split equally between Nelly and Eldrick, with provisions for any predeceased child’s share to go to their descendants. Therefore, the estate’s residue of $750,000 less taxes is divided equally between Eldrick and Nelly’s two children.
By transferring her investment account to joint ownership with her children, Barbara inadvertently created potential issues:
- Unequal distribution if one child predeceases her
- Loss of control over asset distribution
- Possible tax complications for her children
This example highlights just one of the many pitfalls in estate planning. As always, I would welcome the opportunity for us to chat to see if any estate planning strategies make sense for you and your family.
All the best,
