Probate costs, estate taxes and preserving your legacy

Folk wisdom is often expressed in short, memorable sayings like this: Don't jump over a dollar to save a dime. And that's a good one to take note of - especially when it comes to the potential cost of overeager attempts to save on probate fees. By focusing too closely on those costs, people run the risk of saving a few nickels and dimes on probate while paying way too much in income taxes.

That's where a well-considered probate plan comes in - one that not only seeks to limit probate fees, but also sets out the most efficient methods for limiting income taxes, as well. After all, the main objective is to leave the largest possible legacy to your beneficiaries.

The first step is to determine if probate is a concern for your estate - and to do that, you need to know what probate is and how it works.

Probate is the process by which a will is validated by a court. In most provinces probate fees are calculated on the fair market value of all the assets in your estate.
In addition to the probate fees payable to the government, you will normally have to cover the legal costs of hiring a lawyer or notary in order to obtain probate, and your executor may also choose to take a fee.
Although the rules differ from province to province, probate fees generally apply to the entire value of your estate, with no deductions for debts, although some provinces allow a deduction for mortgages on real estate.
You may be aware that probate is not necessarily a legal requirement. However, in most cases, financial institutions will not release moneys until the completion of probate. Usually, real estate (with certain exceptions) can't be transferred without having received probate for a will. If a will that has not obtained probate is subsequently ruled invalid (by the discovery of a later will, legal challenges, etc.) the executor or any third party that erroneously paid out money or property can be held personally liable.

You can reduce probate costs - and more importantly, taxes - by reducing the value of your estate through asset transfer strategies, such as:

Assets held in joint ownership with a right of survivorship may pass directly to the surviving owner(s) when a joint owner dies. (The exception is Quebec where this concept is not recognized. Assets held in joint ownership are normally split equally between the deceased’s estate and the other joint owner.) The property is usually not considered part of the estate and is not subject to probate, although if you add an adult child as a joint owner, it is possible that the asset will be deemed to form part of your estate.
Distributing assets during your lifetime either directly or indirectly through a trust reduces the value of your estate. In addition to losing control over those assets, you can be hit with taxes for unrealized capital gains, so careful planning is definitely a must.
Designating beneficiaries on certain types of RRSPs, RRIFs and segregated funds offered by insurance companies, company pension plans and life insurance policies keeps them out of your estate. However, if the RRSP or RRIF beneficiary is someone other than your spouse, your estate will need sufficient funds to pay the income taxes owing on your death. (In Quebec, this strategy is only effective with respect to life insurance products.)

Each probate planning strategy needs to be assessed according to your personal and financial situation and the rules in your province of residence. That's why professional advice is vital. Your Investors Group Consultant and lawyer can help ensure you structure your assets and estate to limit probate costs and taxes while enhancing the legacy you leave behind.

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Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant.