It is no surprise that a large proportion of the estate litigation files that we see result from someone who is now incapable or deceased and who waited too long to plan his or her estate, leaving their relatives to deal with the aftermath.  What may be less obvious, however, is that a lot of the problems that we encounter can also be caused by estate planning choices gone wrong.

The typical scenarios arise where someone is concerned about estate administration tax (formerly “probate fees”).  Under the Estate Administration Tax Act, 1998, tax is payable only when someone applies for a Certificate of Appointment of Estate Trustee, and then only on the assets that pass through the estate.  Accordingly, estate planning is often aimed at reducing the amount of estate administration tax payable on death by employing other means of transmitting wealth.  When they work properly, these techniques help to avoid some probate fees.  When they don’t work, there can be catastrophic consequences.

Joint Tenancy

One of the strategies that is often employed is for a parent to put their property into joint tenancy with their children.  The idea is that when the parent passes, the child will inherit the asset by right of survivorship, avoiding the need for a Certificate of Appointment (and therefore the need to pay any estate administration tax) or taking the value of the asset out of the estate covered by the Certificate (thereby reducing the amount of tax payable).

If, however, the parent’s intentions are not properly documented and communicated to his or her children, questions can arise about whether the parent intended that the property be sold and divided up according to his or her Will, or whether the property was intended to be kept by the other joint tenant.  Other problems can arise if the child decides to sell the property, gets into debt and needs to sell the property to satisfy creditors, or splits with a spouse and needs to force the sale of the property to make an equalization payment or for child or spousal support.  These problems arise with alarming frequency and generate much of the estate litigation files that we see regularly.

Multiple Wills

Another common tool to minimize estate administration tax is to prepare multiple wills.  All of the assets that will require a Certificate of Appointment to be administered are dealt with under one will and all of the other assets are dealt with under a second.  An Application for a Certificate of Appointment is filed in respect of the first will, but not the second.  Estate administration tax is then payable only on the assets that are subject to the first will.

Drafting of multiple wills can be more complicated and errors can arise more frequently, leaving a mess for the beneficiaries to sort out.  In a case which we recently blogged about (“McLaughlin et al v. McLaughlin”), the drafter duplicated the specific bequests and included revocation clauses at the beginning of each will such that one purported to revoke the other.

While useful in saving some tax, careful consideration should be given to whether the amount of tax savings is worth the added complexity and the increased chance for errors to arise.

Inter Vivos Gifting

The most obvious way to avoid estate administration tax is simply to reduce or eliminate the value of the estate by transferring property to the next generation during the testator’s lifetime.  Usually, this is done from parent to children on the understanding that if the parent ever needs support, the children will be willing to do the right thing.

The risks here are obvious.  Family relationships can quickly turn sour, leaving the parent without assets and without recourse.  The child can have some bad luck financially and lose the asset to creditors.  If the child dies unexpectedly, his or her heirs may assert their rights to that asset to the detriment of the parent.

Conclusion

Avoiding tax is an important consideration in estate planning, and careful thought should be given to it.  It is important to remember that minimizing tax on an inheritance is secondary.  The main goal of any estate planning exercise is to provide peace of mind to the testator by ensuring that the people who they want to receive their property when they are gone are the people who actually receive it.  Estate administration tax is only 0.5% of the first $50,000 and 1.5% on the rest.   Sometimes, paying a little bit of tax can save a lot of trouble.

At Eisen Law in Toronto, our knowledgeable and experienced estate litigation lawyers can help you with any and all issues involved in estate planning. We offer free initial consultations and work hard to ensure you can easily access the legal advice that you need. Call us at 416-591-9997 or contact us online