The word “probate” seems to come up a lot in estate planning conversations these days. Most people want to know what it is and why it is required. To know what it is requires a little Latin, because it comes from the Latin verb probere — to prove. Most wills contain the words “this is the Last Will and Testament of….” A person may execute several wills in a lifetime, but generally it is the last one that expresses his or her final living wishes. The purpose of the probate process is to prove that the document placed before the court represents those wishes.
In most cases, which will is last is obvious from the document, which is usually dated and contains a sentence revoking all previous wills. Sometimes there are subsequent codicils, which are a form of will, the usual purpose of which is to amend an existing will in a minor way, such as changing the name of the estate trustee in the original will. Unfortunately, there may be several codicils and therefore several amendments, and herein lies the problem.
Depending upon the skill of the person or persons who drafted the codicils, reading all of the documents together may lead to confusion as reference to assets or beneficiaries may overlap or may conflict. This happens most frequently when the testator decides to make will repairs at home, without any legal assistance.
This situation provides a good example of the value of he probate process, which is to make sense of the last Probate wishes of a testator as contained in the wills and codicils that have been left behind. The court may refer to statutes relating to succession, which provide guidance in interpreting wills. In addition, there are also various reported decisions of other courts, some centuries old, which set out certain basic rules for interpreting wills, always with the goal of avoiding an intestacy and trying to come to a comprehensive view of a testator’s wishes, given that he or she is not available to discuss the matter personally.
The end result of the court process is probate. The court will provide a “Certificate of Appointment of Estate Trustee With a Will.” One of the instant benefits of this process is the recognition of the person who will act officially on behalf of the estate. In modern legal parlance, this person is called the estate trustee, but in reality this is the same person we used to call the executor or executrix.
So who needs all of this proof, especially in the simple case where there is only one testamentary document that nobody has disputed? The answer is banks, trust companies, stockbrokers, real estate agents, registry offices and any other financial or governmental body that insists on official verification of the estate trustee’s authority to act on behalf of the estate. This is based upon the reluctance of these institutions to part with the deceased person’s financial assets until there is something in their files that protects them when they do decide to distribute.
Some institutions will release assets without probate, usually for smaller amounts of up to $10,000, but it varies from institution to institution. This threshold is often flexible. In return for this flexibility, the institution will usually require a personal
indemnity from the estate trustee to protect the institution in the event that the will is challenged and monies are paid to the wrong person. With this in mind, probate is often preferable to putting your personal signature on the line but each situation
requires a weighing of the risk of proceeding without probate. Remember that probate protects the estate trustee from personal liability when distribution is made in accordance with the provisions of the probated will.
Ontario has one of the highest probate fees schedule in the country. For example, an estate worth $500,000 would attract fees of $7,000.These fees are now known by provincial statute as Estate Administration Taxes — or EAT, which somehow seems appropriate.
Some assets do not require probate, such as life insurance policies and registered retirement savings plans payable to a specific named beneficiary. These assets pass outside the estate and are payable immediately, upon proof of death, to the named beneficiary. This is a very convenient way of moving assets quickly to meet the immediate exigencies such as funeral expenses and probate fees that may be required in respect of other assets. In the case of registered retirement savings plans, where a spouse is the named beneficiary, all of the money in the plan can be rolled over to the spouse named as beneficiary without triggering any capital gains tax consequences on the exchange.
Assets also pass outside the estate when the deceased held them jointly with a surviving beneficiary. This is very appropriate between spouses, but a word of caution is necessary where assets are held jointly with the next generation. Let us say that a widowed mother places title in her principal residence in joint tenancy with her son, who resides in another part of the city with his wife and family. Ordinarily, the widow’s principal residence would be transferred after death without capital gains tax just as it would have been during her lifetime, but by placing one-half of the property in the name of her son, half of the tax-free benefit is lost because half of the property is not her son’s principal residence.
It gets worse. The son is now a joint owner of his mother’s house. He can exercise all of the rights of ownership and move in at will with his family. If he decides that the house is not suitable for his accommodation, he may exercise the right of a joint owner to force the sale of the property to realize his new found “investment.” Even if the son does not move in, he now owns a property that may be an attractive asset to his creditors to cover his debts, or, if he and his wife suffer a marriage breakdown, his half interest in his mother’s property may become part of his net family property, to be divided with his wife in any subsequent divorce.
Many forms of property can be held jointly, such as stock portfolios, mutual funds and motor vehicles, but the one that seems to generate the most attention in the courts is the joint bank account. In this case, the mother transfers her bank account into joint names with her son with right of survivorship. Normally, this is done for purely logistical reasons because of her inability to get out to the bank or the bank machine. In this scenario, it does not matter to the bank where the money came from. The son has equal access to it and there are no laws that regulate the manner in which he is able to operate this account or how much money he withdraws. On his mother’s death, the son will inevitably claim that he was a great help to his mother in the managing of her affairs and that she intended that he would have all of the remaining money in the joint bank account following her death. This assertion will usually get the attention of his siblings, who discover that mother’s only remaining asset turns out to be this bank account. This unfortunate scenario is played out daily in the courts of Ontario as siblings argue over what mother intended when she named her son as the joint signatory on her bank account.
The much-preferred course of action for mother is to grant to her son a Power of Attorney for Property, which imports no survivorship rights and makes her son accountable for every dime spent by him or her while exercising the Power of Attorney for Property. Given the utility of the Power of Attorney for Property, it is always surprising that using the joint account to avoid probate fees is so prevalent. The fear of incurring probate fees should not drive away common sense nor interfere with good tax planning. The probate process is meant to protect your wishes after you have moved on.
John Johnson is a partner with the law firm of Nelligan O’Brien Payne LLP (www.nelligan.ca), with offices in Ottawa, Kingston, Vankleek Hill and Alexandria.
[This article was originally published in the July/August 2006 issue of Fifty-Five Plus Magazine.]