Triggers for updating your will: changes in estate and tax law
By AdvocateDaily.com Staff
This is the final post in a three-part series where Toronto wills and estates lawyer Mary Wahbi talks about the life events that should trigger a review of your will. In this instalment, she explores changes in estate and tax law.
There’s a Chinese curse, ‘May you live in interesting times,’ and it’s not supposed to be a positive thing. The last few years have been interesting times for legal and tax changes affecting wills, says Toronto estates and wills lawyer Mary Wahbi.
While laypeople are generally aware of two of the three reasons they should revisit a will every few years — changes in assets and family situations — they may not be as aware of the third reason: to ensure that changes in laws governing estates and the way inheritances are taxed will not derail the testator’s careful planning, says Wahbi, partner with Fogler Rubinoff LLP.
“A will is not a document that can adapt to changes,” Wahbi warns. “And it’s not realistic for the legal profession to contact clients and say, ‘Oh, by the way, there’s a change of law.’ That’s not going to happen,” she tells AdvocateDaily.com.
“It really is incumbent on the person to be proactive about making sure that what they’ve done makes sense years down the road.”
Wahbi recommends a will review every three to five years, but knows this often doesn’t happen. In this area of law, a large number of clients are one-offs, she says. And although the news media will report on major tax changes and many law firms keep informative websites, there’s no substitute for regular checkups with the lawyer who drafted your will.
Wahbi outlines some recent legal and tax changes that might affect an older will.
Until two years ago, testamentary trusts — those set up to shelter income in an estate payable at death — were taxable at the same graduated rates of tax applicable to an individual.
“That gave high-net-worth individuals the opportunity to do some pretty valuable planning,” Wahbi says. “A testamentary trust could be set up and high-income earning beneficiaries could take advantage of the creation of a second taxpayer for their benefit. The testamentary trust would be a separate taxpayer, entitled to the same graduated rates of tax rather than having their inheritance added to their own assets and paying tax at the highest marginal rates on all of the added income.
“In addition, these beneficiaries could be given the opportunity to share their inheritance with their non-working spouse or non-earning children who could be discretionary beneficiaries, thereby also achieving income splitting.”
But on Jan. 1, 2016, changes in the Income Tax Act ended all that, changing the taxation of testamentary trusts to the highest marginal rate on all income earned by such trusts.
Recognizing that the administration of an estate takes time, the government established a three-year interim period during which graduated tax rates could still apply to testamentary trusts if certain conditions for a graduated rate estate (GRE) were met.
“Wills need to be revisited to consider whether trusts created in the wills are still useful, need to be amended or eliminated,” Wahbi says.
Another exception to the new rule for testamentary trusts is a new type of trust that was introduced for beneficiaries who qualify for the disability tax credit. Called the Qualified Disability Trust (QDT), Wahbi says it is another vehicle available for families to provide for a disabled beneficiary.
"Previously, estate planning in Ontario for disabled beneficiaries was limited to the use of a Henson Trust, which enabled a disabled beneficiary to receive money without losing access to other, non-monetary but important benefits under the Ontario Disability Support Plan (ODSP), such as medical and support services," she says. "Now careful consideration needs to be given and estate planning revisited to consider the best solution in each case of a disabled beneficiary."
Some assets, such as houses and cash in bank accounts, require a probated will for their administration while others, such as shares in private corporations, RRSP funds and personal possessions, including cars and boats, do not. Older wills may not have taken into consideration the tripling of probate fees that occurred in Ontario in 1994, Wahbi says.
“Many people have very old wills, done in the early 1990s.”
The new Estate Administration Tax, formerly called probate fees, was increased to one-and-a-half per cent of the value of the estate from half a per cent of the value.
“At the same time, you had real estate growing in value exponentially. So the regular person in Toronto who owned a house saw the value go from not very much to $1 million. At one time the probate fees would have been a few thousand but now they’re $15,000 for a property worth $1 million. And the bigger the estate, the bigger the Estate Administration Tax.”
Wahbi says lawyers saw this as a money grab — the court doesn’t do anything different for a $5,000 estate than it does for one valued at $50 million. So estate planning lawyers came up with a way around it: double wills. If a will is to go through probate, all the assets governed by it count toward the fee charged. With two wills, one contains all the assets that don’t have to go through probate, while the other holds only those items that do.
“I have clients now that haven’t looked at their will for some time, and they have significant corporate assets, and it’s really not that hard to save them a bit of money,” Wahbi says. “But they need to revisit their wills.”
Who’s in the will, who’s out?
The definition of who is a child or grandchild of a testator changed in 2016 with the All Families Are Equal Act, as well as with the continuing change in reproductive technology. Now, a child who is conceived after the death of a parent — perhaps the father’s sperm or the mother's egg had been frozen — is eligible to inherit and seek support from a deceased parent’s estate.
“There’s a whole body of new law, a statute put in place that as it unfolds in various areas is going to be a bit scary,” Wahbi says. “The All Families Are Equal Act made changes to various acts, including the Succession Law Reform Act.
"You have to now consider a child born up to three years after a person dies — they still count for the purposes of estate distribution. You have to think, do I want that? What if it’s my grandchild or great-grandchild? How’s that going to work? There’s no consensus yet among estate lawyers, but we’re bringing it to our clients’ attention.”
To read Part 1 — changes in assets that should trigger an update in your will — click here.
To read Part 2 — changes in family life situations that should trigger an update in your will — click here.