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Mills & Mills LLP: Meghan O'Neil

The importance of distinguishing between estate assets and assets outside of your estate

 

When forming an estate plan it is important to understand which assets form part of your estate and will thus be governed by your Will. There are a number of assets that may not form part of your estate and for which there are various advantages to them remaining outside of your estate.

Assets Outside of Your Estate

Registered plans (i.e. RRSP, RRIF, TFSA) with named beneficiaries will not form part of your estate at your death. The advantage of this is that the named beneficiary will be able to directly receive these funds from the institution you hold the registered plan with. If a successor holder or successor annuitant is named (only available for spouses), the spouse can essentially step into the shoes of the deceased as the new owner of the plan.

This is desirable because the person you want to benefit from the funds can receive these funds faster than they could if these assets formed part of your estate requiring probate. Obtaining probate from the court (in Toronto at least) can take approximately 6 to 8 months from the time it is applied for. Transferring funds to a beneficiary is a much faster process.

Another advantage to naming beneficiaries (or successor holder/annuitant as the case may be) is that these assets will not be subject to estate administration tax (commonly known as “probate tax”). In Ontario, probate tax is $250 on the first $50,000 (0.5%) of estate assets, and $15 on every $1,000 above that (1.5%).

The same advantages apply to a life insurance policy which has a named beneficiary, and typically to an asset owned jointly with right of survivorship (although the treatment of joint accounts can be contentious depending on the circumstances).

Estate Assets

Non-registered assets that are owned in your name alone will typically form part of your estate and thus be subject to the probate tax mentioned above.

As with many legal matters there may be exceptions to the rule depending on the specific facts at hand. For example, most of the time real property owned solely in the name of the deceased will form part of his or her estate and be subject to probate tax. However, there are certain exceptions, including one known as a “first dealings” exception, whereby real estate can be transferred without being subject to probate tax.

Another exception may be where the only asset forming part of the estate is a bank account worth less than $50,000. Depending on the financial institution where the account is held, the bank may be willing to release the funds without requiring that the account go through probate if the estate trustee (commonly known as “executor”) signs an indemnity.

Multiple Wills & Trusts

A person can have more than one estate and use multiple Wills to avoid probate tax on any assets that can form part of their Secondary Estate (rather than the Primary Estate, which is subject to probate tax). For some people an alter-ego, joint partner trust, or other type of trust may offer a suitable means of avoiding probate tax and keeping assets outside of their estates.

An Important Distinction

It is relevant to understand which assets form part of your estate and those that don’t not only for the purpose of avoiding probate tax and getting beneficiaries their inheritances faster, but also to ensure your overall objectives are met.

For example, a testator (person signing Will) may set up a spousal trust in his or her Will with the intention that upon his or her death, assets will be held in trust for the benefit of his or her spouse for the lifetime of the spouse. Upon the spouse’s death, the testator’s children will inherit what is left in the estate. If this testator owns all of his or her assets jointly with his or her spouse, then there would effectively be no assets falling into the estate and thus no assets in the spousal trust. Rather, all assets owned jointly with the surviving spouse would pass by right of survivorship, and the objective of trying to ensure funds remained for capital beneficiaries (the children in this case) would not be met.

Payment of taxes at death is another important reason you must understand which assets will form part of your estate at your death. Your estate will be responsible for paying your debts and taxes. Planning to ensure that funds are available for tax burdens at death is a key part of the planning process and considering which assets will be in the estate to pay these taxes is crucial. For example, unless the Will states otherwise, taxes payable on a RRSP/RRIF must be paid by the estate, rather than the named beneficiary receiving the funds outside of the estate. If there are different people named as beneficiaries of your Will and your registered plans, it is important to factor this into ensuring your estate planning objectives are met.

At Mills & Mills LLP our estates group team can assist you in developing an estate plan that considers the above factors, among others, to best suit your needs. To learn more about how we may be able to assist you please reach out to us at 416.863.0125.

 

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