For some Canadians, strategies to minimize probate fees1 are an essential part of estate planning. Last month, in part 1 of our series about probate fee minimization, we covered basic facts related to probate fees and beneficiary designations. In this article, we focus on the pros and cons of gifting.
Generally speaking, if you don’t own something when you die, your estate won’t have to pay probate fees on it. So one way to reduce probate fees is to simply give up ownership. One way to do this is to gift property to a beneficiary while you’re still alive, which isn’t unusual when people think they’re going to die soon.
However, some clients may employ this strategy too soon. They gift their property when they’re ill and then make an unexpected recovery. They may want to undo or modify an earlier gift transaction, but that can be complicated – especially if the recipient has already spent the gift.
This type of gift plan could, in fact, leave someone in poverty. Before a client opts to give away a portion of their wealth while they’re living (assuming they’ll become entitled to a larger share of provincial benefits based on income), careful consideration is a must. A client’s expectation that they’ll receive adequate future care from either the province or from the recipients of a gift requires the advisor to have an in-depth and well-documented discussion with them. If a client is thinking about giving up title and control of an asset, they should at least consider an agreement with the new owner, stating the benefits the client will continue to enjoy during their lifetime in exchange for the gift.
Unexpected life events – A commonly overlooked trap is the risk that the recipient of a gift, often a child, dies before the gift giver. As many Canadians live into their 90s, their children are often senior citizens by the time they inherit. The unexpected death of a gift giver’s child may be compounded by the terms of the child’s will, or by an intestate distribution. By dying without a provision to return or share the benefits of gifted property, even a well-meaning child could cast a parent or grandparent into poverty, as gifted assets may be automatically distributed to more distant (and potentially indifferent) beneficiaries.
Marginal tax rates – Gifting to the next generation can have another tangible cost. Many seniors have a low income tax liability, which may be partly due to substantial medical expenses. Consider a gift where the recipient has agreed to use the after-tax income from the gift to pay for the senior’s care. If the recipient is in a higher tax bracket than the original owner, there will be less after-tax investment income to use for the senior’s benefit. It makes little sense to avoid a 1.5% one-time probate fee only to incur higher marginal rate taxation on annual income generated by the assets.
Joint ownership – A more common variation on gifting is transferring assets into joint ownership with right of survivorship.2 Any asset capable of registered title can have multiple owners. Between spouses, this is probably the most common form of estate planning. It’s also extremely common between parent and child in an effort to avoid probate fees. With this approach, both legal title and legal control are shared. There may be an assumption of shared benefits from the property if there’s no agreement to the contrary.
This approach also covers off the risk of the new co-owner predeceasing the original owner, in which case, title to the asset reverts to the original owner. If there are more than 2 joint owners, the survivors will usually share equally in the acquired ownership of the new portion.
But there’s a potential trap: loss of control. By giving up sole ownership of an asset, clients give legal rights to another party. For example, joint bank accounts usually give the new co-owner the right to withdraw any or all funds. You can’t undo this arrangement without the consent of the new co-owner, regardless of the original source of funds.
Clients also need to know that gifted assets will be exposed to the new co-owner’s creditors and aren’t protected from seizure.
Under the Family Law Act in Ontario, when a marriage breaks down, the capital value of gifts or inheritances received from third parties during marriage is excluded from the financial division calculation. This calculation is known as the equalization payment. If a gift was kept intact and segregated in the recipient’s name, it’s excluded from the calculation. The income generated by that gift or inheritance can also be protected, if the gift giver stipulates that. But this doesn’t mean that the former spouse won’t target the assets as part of the litigation process. Inherited wealth enhances a spouse’s ability to pay support, either ongoing or as a lump sum. Ex-spouses may acquire indirectly what they aren’t entitled to directly.
If assets pass directly to one beneficiary by joint ownership, they’re out of the estate’s control. To some beneficiaries, this may be perceived as an inequitable distribution of the total estate. It may be compounded if the death of the joint owner creates a taxable disposition, or recapture of depreciation, which is taxable in the estate even though the joint owner actually acquires the property.
On the other hand, the client may really intend that when they die, their child will become the sole owner of property the client transferred into joint ownership with that child. But the strategy may not be effective for joint bank accounts unless there’s a clear intention of a gift. Two Supreme Court of Canada cases have shown that, without clear intention, the surviving child may be presumed to be holding the assets in a resulting trust for their parent’s estate.3 In other words, they’ll have to share the asset with the other estate beneficiaries, even though their parent wanted only them to own the asset after the parent died.
Part 3 – Trusts
Our final article in this 3-part series will focus on trusts. Watch for it next month. In the meantime, visit the Money for Life legacy needs page on sunlife.ca/advisor or contact your sales director to learn more.
This article is based on a financial bulletin authored by Jeffrey Waugh, Director, Tax and Insurance Planning, Sun Life Financial, Probate Minimization Strategies: Tips and Traps, November 2014.
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1 In Ontario, taxpayers no longer pay probate fees. Instead, they’re subject to the Estate Administration Tax Act, 1998 (EATA), introduced in response to the Supreme Court of Canada ruling in Eurig Estate (Re),  2 S.C.R. 565, which held the former provincial probate fees constituted an invalidly introduced tax. This statute retroactively imposed a valid tax precisely equal to probate fees that had been collected since 1950. Despite the small variations in terminology across the provinces, the terms probate and probate fees are still used in this article.
2 See footnote 3. Not applicable in Quebec.
3 See Pecore v. Pecore, 2007 SCC 17 and Madsen Estate v. Saylor, 2007 SCC 18.