Probate and Estate Taxes

[sydney2]

I haven't been posting lately. I lost my Step-Father and have been busy organizing the estate. Transferring RRIF's to my Mother, CPP survivors benefits and all the important details. I don't know what some people in their later years do if they have no one to navigate them through this journey. I had Power of Attorney over Health and Finance, and had no problem in any situation. The will was direct and clear.

Now for my point. the RRIF's no problem, with named beneficiary as Wife. I was fortunate enough to have everything else in joint names, he trusted me with everything and about 10 years ago, he was invested only in GIC's. I took that over and through investment in trusts and some good preferred's, his estate has grown and he was able to live off the income without touching the principle. We do not have to probate this, because of the joint survivorship arrangements. When I went over the cost of probate in the P of Ont. it is expensive. One of the best funds he had was Dynamic Focus with (I believe) Henry Belaiche - Manager. We had NPI.un, NAE.un and it he had the security he needed and wanted during these last years. I certainly will try and make this transition easier for my kids.....

[Bylo Selhi]

We do not have to probate this, because of the joint survivorship arrangements. When I went over the cost of probate in the P of Ont. it is expensive.

Sorry about your loss. It seems that you and your step-father had his affairs pre-arranged well so as to simplify the task of distributing the estate.

But be careful with probate-avoidance using JTWROS. In ON probate is 0.5% on the first $50,000 and 1.5% above. (The rates are generally lower in other provinces.) That may seem like a lot of money, especially on a large estate, however it's less than a year of MERs and far less than the capital gains tax on appreciated assets. While one should always try to minimize costs and taxes, sometimes the JTWROS strategy, especially with family members other than the spouse, can backfire.

Suppose someone had won a judgement against you. If the creditor knew that your step-father had assets held JTWROS with you, they could go after those assets. As a result your step-father could have suffered financially simply because he tried to do you a favour re probate.

OTOH sometimes JTWROS can do more than just circumvent probate. Suppose a parent has a large sum in GICs. Ordinarily they'd be subject to the CDIC limit of $100k. However with clever use of JTWROS they could extend that limit substantially without having to use multiple institutions. For example, if there are 3 children they could buy $300k in GICs, one third of which are JTWROS with one child. Each $100k tranche is separately CDIC insured yet the death of the parent would see 1/3 of the GICs go to each child.

[Arby]

For example, if there are 3 children they could buy $300k in GICs, one third of which are JTWROS with one child. Each $100k tranche is separately CDIC insured yet the death of the parent would see 1/3 of the GICs go to each child.

My local community newspaper contained an article by a financial planner which indicated that JTWROS has sometimes led to estate problems. The article cited a case where a father transferred his bank and investment accounts to a JTWROS account with his daughter. After the father's death, the other siblings took legal action against the sister, claiming the father had actually intended that the JTWROS property was to be held in trust for the estate by the daughter and distributed to all of the heirs on his death. According to the article, the court has sometimes viewed JTWROS property in this manner. The articles suggests that a codicil be added to the will to clearly indicate the intent of the JTWROS property upon death, (i.e. the property is to go to the joint survivor, not the estate).

[Bylo Selhi]

After the father's death, the other siblings took legal action against the sister, claiming the father had actually intended that the JTWROS property was to be held in trust for the estate by the daughter and distributed to all of the heirs on his death. According to the article, the court has sometimes viewed JTWROS property in this manner.

Although my example was meant to show how to use JTWROS to increase CDIC coverage beyond $100k, it also neatly serves to split the estate into three equal pieces so I doubt the heirs would have had any legal basis to dispute that particular arrangement.

The articles suggests that a codicil be added to the will to clearly indicate the intent of the JTWROS property upon death, (i.e. the property is to go to the joint survivor, not the estate).

Or presumably it could also be worded to indicate the other intention, i.e. that the proceeds be held in trust for the estate.

I wonder if there are any tax implications with either option. (Perhaps not, since CRA attributes tax on the income to the parties in proportion to their contribution to the principal.)

[sydney2]

bylo selhi: Your points regarding joint ownership obstacles are very true. However, in our case there was a lot of trust and my Step-Father knew that everything would work out ok. During this transition, of settling the estate,I have heard horror stories and this does not work for everyone. I seem to have the business sense and my Sister just goes along with it, I have made money for the estate over the time we have been joint owners. My Mother is now 86 and her estate will be split between my Sister and I. We are joint on everything she owns, I am the executor. My Sister will be involved in every aspect of this when we have to go through it, I have told her if we are going to fight over anything, you can have it!!! We have 5 children between us and probably the bulk of the funds will go to them. I am so fortunate.......

[Bylo Selhi]

When writing your will, make sure your intentions are clear

Things can move from mere confusion to costly legal battles if you leave your heirs uncertain about your intentions when you're gone. And few things can cause greater problems than joint ownership... A simple solution exists here. First, think twice before placing significant assets in joint names. Second, always write down whether your intentions are to hold assets jointly for convenience, or because you intend to make a gift to the joint owner(s). Make sure your financial and legal advisers have a copy of this written intention.

[sydney2]

Bylo this is a very good article. No doubt this situation could arise in any family, and a family member, like this Daughter, could take advantage of the situation. At this point for us, my Mother's accounts are in joint ownership with both my Sister and myself. I trade on the non-registered brokerage account, but copies go to Mom and her.

In our family we talk so openly about this and I don't have any fears that we would have problems. Having said that as my Husband and I get older we will be looking at ways to transition assets easily, so this info is good to have.

I have 3 kids - but one would have to have assets structured, or they would be gone in 3 minutes, and we have to find a way to do this.

[ockham]

And few thing can cause greater problems than joint ownership..

.

Some weeks after my father-in-law's death (a few years ago), my wife and her mother attended at the bank to transfer all the JWROS accounts into the name of my MIL alone. The helpful bank teller suggested that, while she was at it, my MIL should switch all accounts into JWROS with my wife "for convenience and to save probate fees and taxes". None of the following were mentioned:
1. tax consequences, if any, of the switch?
2. convenience?? Would other assets of a prospective estate make probate of a will necessary in any event?
3. fees and taxes?? in this province, those run at .6% of assets
4. how many other children in the family, and how well do those children get along? how likely is it that my wife would like to stiff one of them, or one of them would like to accuse my wife of taking advantage?
5. how stable is my wife's marriage? in a messy divorce, perhaps I'd be willing to claim that her share in the account was a shareable asset in the divorce settlement
6. what is my wife's credit situation? might her creditors be interested in learning about her interest in these jt accounts? what position would a trustee in bankruptcy be likely to take?

Even Bylo's example further upthread of 3 separate jt 100K accounts with each of 3 children can be problematic. The example presupposes that the parent dies first. Suppose one of the kids does? That jt account arrangement together with a simple will directing everything to be divided equally between the 3 kids, will result in 2 kids getting 100K each from the jt account and 2/3s of the third jt. account that reverted to the parent on the third child's death, leaving the family of the third child with 1/3 of the 100K. Maybe what was intended and wished for, but probably not.

JWROS accounts are just fine in some circumstances, but far too often court disaster to save a few dollars.

[Bylo Selhi]

Even Bylo's example further upthread of 3 separate jt 100K accounts with each of 3 children can be problematic...

Hence Cestnick's article in yesterday's G&M and his admonition to "always write down whether your intentions are to hold assets jointly for convenience, or because you intend to make a gift to the joint owner(s). Make sure your financial and legal advisers have a copy of this written intention."

IANAL but ISTM one could avoid the situation you describe without compromising on the CDIC coverage by indicating in one's will, or in a codicil to it, that all JTWROS holdings are for convenience only. Or am I missing something?

(Presumably those holdings will then be subject to probate, so this does come at a small price.)

[smelly]

Now, when you put assets in joint names, there's no question you have changed the "legal" ownership of the assets. But this is not the same as changing "beneficial" ownership. From a tax point of view, changing legal ownership alone does not give rise to a taxable disposition -- that is, a taxable event. Changing beneficial ownership, however, can be a taxable event (unless you're transferring ownership to your spouse). But I digress.

This (my emphasis) is news to me. I'm gonna have to look into this further because I always understood anything re-registered as JTWROS meant that the original owner must claim a dispo.

[AltaRed]

Now, when you put assets in joint names, there's no question you have changed the "legal" ownership of the assets. But this is not the same as changing "beneficial" ownership. From a tax point of view, changing legal ownership alone does not give rise to a taxable disposition -- that is, a taxable event. Changing beneficial ownership, however, can be a taxable event (unless you're transferring ownership to your spouse). But I digress.

This (my emphasis) is news to me. I'm gonna have to look into this further because I always understood anything re-registered as JTWROS meant that the original owner must claim a dispo.

Can assure you there is no tax trigger (at least on investment accounts) as long as beneficial ownership is retained with original owner and that owner reports income, cap gains, etc on their tax filings. Been there and done that a number of times. We have done that with investment real estate as well. There may be wrinkles on principal residence situations.

[kcowan]

... There may be wrinkles on principal residence situations.

Yes we have looked at that with both MIL and brother (no wife or kids). Usual issues WRT other claims (i.e. wife or bank) but what caused us to take a pass was the cap gains on half the property upon disposition. Not principal residence so taxable for us. During the mania phase of real estate run-up (now passed in North Toronto and Richmond BC?), we decided to take the risk of probate hassles relative to cap gains liabilty.

Might have another look during the "reversion to mean".

[beaverlodge]

we decided to take the risk of probate hassles relative to cap gains liabilty.

Correct, always.


Tax considerations should not trump investment intent;
ie saving probate

From Sydney 2

I have 3 kids - but one would have to have assets structured, or they would be gone in 3 minutes, and we have to find a way to do this.

They wouldl not be gone in 3 minutes or 30 years if they were properly structured with Life Insurance Succession Protection. And there would be no probate on these proceeds.

[Norbert Schlenker]

Life Insurance Succession Protection

Do tell us more.

[Bylo Selhi]

More cautionary tales about trying to avoid probate and/or trying to be nice to your heirs by transferring ownership or changing to JTWROS: Transferring ownership to heirs early can be tricky

But Rosentreter warns families should not overblow the significance of probate taxes. Probate taxes, or fees, are really only a small percentage of the value of an estate... Transferring ownership of real estate "is such a magnified issue with the rise of real estate values in the last five years," says Rosentreter. "You really need to seek professional help from a lawyer and an accountant expert on taxes before putting anyone's name on title on real estate."...

Rosentreter points to a case in British Columbia in which an elderly parent was forced out of her home as a result of her son's divorce and his obligation to share net family assets with his former wife. Other claims could arise if the future heir couldn't pay debts, or was sued for causing serious injuries in a vehicle collision or who suddenly died with heirs of his own who were in need of support. "Failure to take account of the tax (and other) aspects of transferring ownership of property before death can blow up a family," cautions Rosentreter. "Gifting before death can make things worse if the goal is to be equally fair to your whole family."

[ockham]

In the Province of Manitoba, the so-called "probate tax" is 7/10 of 1% of the sworn value of the estate. Much toxic financial planning advice, particularly advice to go to JTWROS, is given in service of avoiding this "tax".

[sarahbrightman1234]

A lot of the things we have been wondering about are answered on this website, which is maintained by a probate law firm. They have FAQs, overview, glossary, etc: http://www.tahanlaw.com/Arizona_Probate_Overview. Hope that helps.

[brucecohen]

A lot of the things we have been wondering about are answered on this website, which is maintained by a probate law firm. They have FAQs, overview, glossary, etc: http://www.tahanlaw.com/Arizona_Probate_Overview. Hope that helps.

probate is a much, much bigger issue in the US than in Canada.

[Jaunty]

One tax consequence of JTWROS is that immediately on the death of the beneficial owner all of the estate falls to the survivor - without probate - but all the "T" slips for the year from banks and investment accounts fall to the surviving "owner". It (apparently) will require letters and perhaps an interview with Rev. Canada to divide the income from these investments correctly between the final tax return and the surviving "owners" tax return.
I am learning this, as my father and I had established everything as JTWROS, based on advice - but failed to note this wrinkle. As he died last month (at 92.56 years!) I've been discovering this and its implications recently. I'm sure Rev. Canada will make this a pleasant experience.
BTW I already did a quick sale of many assets and a partial distribution - but for my peace of mind must wait to file income tax and get a clearance certificate before distributing the rest of the estate, which of course pushes some tax issues (on my taxes) into the next year too.

[gummy]

From Bruce's link:

In the best of circumstances, an informal Arizona probate will take five or six months after the opening of the probate depending on how quickly the personal administrator completes all required duties. The primary reason a probate cannot be completed in less than five months is because the personal representative must give a notice to creditors and then wait four months for the creditors to submit their claims to the estate.

The time period (and hassles involved) worried me, since my brother ain't well and my wife is executor of his will.

When we visited a lawyer in connection with the auction of my brother's house and contents, I asked: "How long, probate?"

He said: "Here, in Waterloo, probate court is easy. It usually takes two or three weeks."

I'm happy.

[kcowan]

It (apparently) will require letters and perhaps an interview with Rev. Canada to divide the income from these investments correctly between the final tax return and the surviving "owners" tax return.

In my experience, the CRA will just doublecheck that the two returns add up to the total amounts. A letter explaining the date of his death and the logic for the % split should suffice. This is a very common occurence. Nothing to fear. It does mean a much more complex filing for your return that year though.

I have been "interviewed by the CRA" on this subject and they really just want to verify the math.