Separate from income tax that may arise when an individual dies, Ontario has an Estate Administration Tax – which we generally refer to as probate fees. Starting in 2019 the first $50,000 of asset value is exempt from probate fees, whereas asset value above $50,000 is subject to probate fees at a rate of 1.5%. This means that an Estate with $500,000 of asset value would incur probate fees of $6,750 [($500,000 minus $50,000) times 1.5%]. The probate fees are in addition to any income tax incurred on an individual’s terminal tax return. There are a myriad of planning options to mitigate probate fees, which include the following:
- Gift assets to family members before death – this avoids probate because the relevant assets are not part of an individual’s estate
- Plan for assets to flow directly to a family member in the event of death – this can be via a direct beneficiary designation for RRSP or RRIF accounts, or by holding investments, bank accounts or real estate in joint tenancy
- Designate one or more individuals as the beneficiaries of a life insurance policy instead of designating your estate as the beneficiary
- Hold assets in a family trust, which can include an alter-ego or joint-partner trust for individuals who are 65 or older
- Contemplate the use of a distinct will for assets that do not require a probated will, for example private company shares
An important caution is that probate fee planning should not drive the estate planning bus. By this I mean that it is fine to minimize probate fees, however, it is important to ensure that the planning steps are in line with an individual’s overall planning objectives. For example, an older individual could contemplate gifting cash to eventually avoid probate fees and later realize that they still require the funds during their lifetime. It is also important that income tax issues be considered when planning to mitigate probate fees. Consider that Alternatively, an individual could gift a cottage to an adult child to avoid probate fees and as such incur tax on the capital gain realized and land transfer tax.
We recommend that individuals proactively review financial and estate planning matters proactively – an evaluation of probate fee planning should be part of this process.