Estate Planning Pitfall #4 - Overplanning for Probate

Estate Planning Pitfall #4 - Overplanning for Probate

Written by Michael Smart

When someone passes away, probate is often required to release those assets to the Executor. Probate is the process whereby the deceased’s Will is submitted to court for verification of the validity of the Will and the Executor’s status.  In Saskatchewan, probate is set at $7 for every $1,000 of a person’s net worth, not including legal fees. In our previous newsletter we reviewed some helpful ways to reduce probate fees, but some people go to great lengths in the effort to reduce or eliminate probate fees and, in so doing, can cause unintended pitfalls.

Title Troubles – one strategy some people employ is to register their assets jointly with a child so that ownership passes to the child and not through the estate of the deceased. However, whenever someone is added to a title, there’s a few risks to consider:

  1. If your child experiences financial struggles or bankruptcy, it could be that their creditors end up registering interests on your titles, because they are in joint with that child.
  2. What if you want to sell your house so you can move into a condo or care home but your child refuses to agree? Now you don’t have full control over your assets anymore.
  3. If your child is married or living common-law, and that relationship breaks down, part of the property may be considered when dividing family property between your child and their spouse.
  4. In 2023, the CRA came out with new Trust reporting rules which may have resulted in the requirement to file a Trust return simply because joint ownership on land with children may be considered a bare trust. Thankfully for 2023, the CRA exempted these ‘bare trusts’ from reporting but had the CRA stayed with their initial decision, the risk to someone who wasn’t aware of this new reporting, could’ve been the big penalty that would’ve been owed to the CRA for not filing. It is unknown if the CRA will require reporting of such arrangements in the future.

Ultimately, by trying to solve one problem, you may have unintentionally created other problems instead.

Faulty Assumptions – Sometimes parents add a child to the title of a home without considering that when a spouse dies, the surviving spouse may end up getting remarried. However, complications regarding ownership can arise when just one parent and their child are on title. If the parent on title dies, where does that leave the surviving spouse who isn’t on title? Will the surviving spouse be allowed to continue living in the matrimonial home if their name isn’t on the title and the surviving child wants the proceeds? Sometimes efforts to avoid probate can cause significant tension in the family for the survivors.

Dysfunctional Dynamics – When you grant someone else joint ownership of your assets, you give them control over those assets. If you have a bank account, a joint owner can access the money in that account just like you can. If you have a child who struggles with addictions, or for some other reason feels entitled to help themselves to the funds in your account, that child could drain your savings very quickly. Suddenly your desire to avoid paying probate seems trivial in comparison to the financial danger in which you unexpectedly find yourself.  

Beneficiary Designations – Another way people try to avoid probate is by designating beneficiaries on specific assets (such as life insurance) to have the proceeds pass directly to the beneficiary. This can be a very effective strategy, but this is best discussed with an estate planner as it has the potential to cause a few unintentional problems such as:

  1. Inequity between beneficiaries if the designations are not equal between the beneficiaries.
  2. A tax bill that leaves the estate illiquid or even bankrupt, which can happen when beneficiaries are designated on tax-deferred assets such as RRIFs and RRSPs.
  3. No money to pay estate expenses, including the funeral bill if all the assets are paid to designated beneficiaries, leaving your executor having to go to those beneficiaries to ask them to contribute to estate expenses.

There are ways to avoid probate, but that should never be the primary goal of your estate planning. Sometimes it may be better to include some assets in probate to ensure that they can be distributed according to the terms of your will and not end up causing unintended stress and confusion. The best advice is to seek personal advice for your individual situation, with a qualified estate planner.

Coming soon! Pitfall #5: Failing to consider the tax implications when planning for your estate.

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