Blog
Practice Areas In This Section

Estate Planning Tools - I

The reasons for estate planning are many. Some of them are the ability to provide for the loved ones, the ability to pass specific assets for the specific purposes and to the specific persons, means to protect yourself from possible abuses by relatives or from absence of such relatives to take care of a person when he or she is older, to protect the assets, tax savings and deferrals, confidentiality. 

The estate planning tools include wills that may distribute the assets directly and immediately or create testamentary trusts into the future or do both, inter vivos trusts for the benefit of beneficiaries chosen by settlor or for the settlor's own exclusive benefit, different types of the ownership of the property (such as joint tenancy or tenants in common). The ways are numerous with their benefits and drawbacks, suitability of each depends on personal circumstances of the individual.

Also, lack of planning may lead to depletion of the assets. For example, all assets will become that of the estate and will be subject to probate fees. That can be avoided by dealing with some of the assets in a way that they do not become a part of the estate. For example, it is usually beneficial to separate life insurance from the rest of the estate. It can be done either by appointing beneficiaries directly in the life insurance policy or by an insurance declaration. This way the insurance proceeds do not become a part of the estate and, thus, avoid probate fees. Another example is to have separate wills for different types of property: transmission of private company shares in British Columbia ("BC") does not require a probate, thus, probate fees would be avoided by putting those into a separate will. Multiple wills should be drafted carefully, so that they are not combined into one.

Wills

In order to prepare a will a person need:

  1. To choose an executor and an alternative executor (in case the first choice does not happen), a person who will be administering the will;
  2. To decide who the beneficiaries will be; and
  3. To decide what portion of the estate should go to which beneficiary.

A will must be witnessed by 2 persons, who are not beneficiaries under it. It is prudent to review the will at least every 5 years as circumstances change, as well as the law.

Benefits

  • Control over the distribution of the estate;
  • Tax planning and optimization.

If a person dies intestate, his or her assets will be distributed according to the intestacy rules that were discussed in previous posts. Additionally, before that distribution can be done, beneficiaries will have to apply to court for letters of administration to appoint a person who will distribute the assets. By making a will a testator appoints an executor and ensures that his or her assets will go to intended recipients, in the amounts the testator thinks fit and at the times the testator wishes.

A person may have multiple wills in order to deal with different types of assets or assets located in a different jurisdictions. A will becomes an even more important documents if a testator has minor children as it allows to name guardians for the children and to determine how the estate will be administered to take care of them and when and in what shares it will be distributed to them.

Tax planning includes passing the assets to the spouse, putting certain assets in a separate wills, dealing with assets outside the will. Some of these techniques provide for tax deferral, some for probate avoidance and all of them aim at making the process easier for the heirs.

Drawbacks

  • Challenges by the immediate family members;
  • Probate process;
  • Probate fees;
  • Public disclosure.

Wills Variation

The Wills Variation Act of BC entitles children, spouses and common-law partners that are not happy with the distribution under the will to apply to court to challenge the distribution and demand for the "adequate provision". The courts interpreted the "adequate provision" as not a narrow test concerning a minimal financial need but a more expansive test, which imposes a greater moral obligation on the testator. The Supreme Court of Canada stated that the courts are to make orders which are just in the specific circumstances and in light of the contemporary standards. Such power of the courts leads to a significant loss of testamentary freedom. Careful drafting will usually lessen the possibility of variation of the will by the courts. For example, if there is a reason someone normally entitled is going to be disinherited (such as abandonment of elderly parent or previous receipt of considerable gifts from the testator), these reasons should be set out in the will to show that the issue was considered and decision was not careless, unfounded or simply spiteful, but reasonable and as such should be upheld.

Though the WESA repealed the Wills Variation Act its provisions are now included into WESA in Part 4, Division 6 and will operate in the same way.

Avoiding Probate

Generally, for administering an estate under the will, the will needs to be probated. Probate process is time consuming, costly and requires public disclosure. Probate tax in BC is levied under the Probate Fee Act, SBC 1999, Ch. 4 at a rate of 1.4% of the gross value of assets in excess of $50,000 situated in BC. The tax is payable on the gross value of the real and tangible personal property of the deceased that passes under the will that is probated regardless of the deceased ordinary residence. Intangible property is deemed to be situated in BC for probate tax purposes if the deceased was an ordinary resident in BC.

Probate tax may be avoided if the will is administered without probate. However, in order for that to happen:

  • There must be complete certainty that:

    • the will in question is the last will;
    • the last will was validly executed;
  • Each person with standing (spouses and children) must confirm that they will not bring a challenge;
  • Each beneficiary under the will must provide indemnity to the executor for administering the will without probate;
  • Any property that requires probate must be dealt with outside the will (real estate, for example). And for that to happen, it must be planned.

Assets outside the will

Examples of dealing with the assets outside the will include passing of the assets on the death of an individual pursuant to the terms of an inter vivos trust, right of survivorship under the joint tenancy, designation in a life insurance, RRSP or RRIF. Probate tax does not apply in these circumstances.

Transferring legal title to real estate prior to the owner's death can reduce or eliminate probate tax. An asset can be transferred outright to an individual, corporation or a trust. Part of the interest may be transferred to create a joint tenancy. While making a decision on property transfers the property transfer tax ("PTT") that applies at the time the legal ownership is transferred shall be considered. The PTT is paid at a rate of 1% on the first $200,000 of the fair market value, 2% on the fair market value between 200,000 and 2,000,000 and 3% on the value in excess of 2,000,000 (with some exceptions where tax rate remains at 2%). In addition there is also a special tax that applies when some residential property, depending on its geographical location, is transferred to a non-resident. Depending on the value of the property and other circumstances it may not be feasible to pay the PTT to avoid the probate tax at 1.4%.

No Comments

Leave a comment
Comment Information