The Elephant in the Room
Probate and what it could mean for your family
When someone passes away, their estate is subject to a process known as probate, and you may have heard this phrase “The will has to go through Probate” before the assets in someone’s estate can be distributed to beneficiaries.
What is probate? Probate is a legal process that confirms an executor’s authority to distribute assets of a deceased’s person’s estate, and an estate is in simple terms, whatever they owned including real estate, bank accounts and personal effects. There are some assets that are excluded from probate including Canada Pension Plan (CPP) death benefits, jointly owned assets with a right of survivorship RRSPs, RRIFs, TFSAs with a named beneficiary other than Estate, and insurance proceeds paid to a named beneficiary.
The Government of Ontario charges a probate fee which is a percentage of the entire estate, which means that probate is one of the factors that will reduce the amount of money that beneficiaries receive (taxes payable upon death will also reduce the net value of the estate to be distributed to beneficiaries).
What does it mean for you and I? It means that we should be arranging our affairs in such a manner that will allow us to legally minimize probate fees and taxes upon death so that our intended bequests to our loved ones actually end up in their hands. Insurance products by their very nature are designed to allow the owner to name a beneficiary and pass the proceeds directly to a named beneficiary, bypassing probate and taxes. GICs, non-registered investments and mutual funds that you, your parents or grandparents have in banks will likely become part of the estate and subject to probate fees.
GICs, and other investments sold by insurance companies are creditor protected, pass to a named beneficiary tax free and bypass probate. GICs and non-registered investments/accounts offered by chartered banks typically do not provide any creditor protection, and will become part of your estate when you pass away. This means that these funds will form part of your total estate upon death, and be subject to probate, and the probate fees are based on the total value of your estate, and not just the value of the money you have sitting in an account at the time of death.
If you could legally pay less taxes and fees and put more money in the hands of your loved ones why wouldn’t you? The difference between families that transfer wealth in a tax efficient manner and those who don’t often lies in the quality of the estate planning. Unfortunately, banks won’t advise you to hold some of your money in an insurance investment because they will lose business; however I have friends who are bankers who hold some of their investments in insurance products because they understand the effects probate fees can have on their families.
Deflate the elephant in the room and act today to safeguard your family’s wealth and your legacy.
About the Author
Karl Marshall is President of Marmac Financial Services Limited, an independent insurance and investment brokerage. He lives in the Durham Region and on Saturday nights he hosts The Party Mix on G98.7 FM in Toronto. You may contact him via email firstname.lastname@example.org @marmacinsurance on Twitter or on Facebook.