Wednesday, March 26, 2008

Transfer of Title to Land Held in an Unregistered Trust on the Death of the Trustee

[Since I wrote this article, the British Columbia Court of Appeal has overturned the Supreme Court of British Columbia decision discussed below. The Court of Appeal decision in Smith v. Graham is reported at 2009 BCCA 192. Accordingly, you may not rely on the process described in this article for transferring title of land held in an unregistered trust to an executor of a will, thereby avoiding both probate fees or property transfer tax.]

Suppose you own land in British Columbia. You would like to transfer the land to a trustee in trust for yourself and other family members. You don’t want to pay property transfer tax when you set up the trust. Accordingly, you sign a document declaring that you know hold the land in trust, but you do not change the registration of the title to the land to reflect the fact that you are now holding it in trust.

On your death, can your executor apply for probate declaring that the value of your interest in the land as trust is nil, and then, once probate is granted, require the Land Title Office to register the land in the executor’s name?

For many years, the Registrar of the Land Title Offices in British Columbia said the executor can’t. The Registrar required that a successor trustee must be appointed under the terms of the trust, and then the title would have to be registered in the trust. Often, the Registrar required a court order vesting title in the successor trustee before changing the registration of title. (Although the one time I had to deal with this issue, the Registrar did not require a court order.)

In a decision released yesterday, Madam Justice Sinclair Prowse held that the Registrar of the Land Title Office is wrong. She reasoned that the Land Title Act , RSBC 1996, c. 250, does not require the registered owner to register the land in trust if he or she holds it in trust. The deceased owner’s interest in the land, even if the deceased was only holding title as a trustee, passes to the executor or administrator. Once the court issues probate or letters of administration, the executor or administrator is entitled to have the title transferred into his or her name in a representative capacity.

Madam Justice Prowse did not see any difficulty with the executor declaring that the deceased’s interest in the property had no value in the application for probate even if the land is worth several hundred thousand dollars. Although the value of the land might be significant, the value of the deceased’s interest in the land is not. The deceased held the land at death for the use and enjoyment of the beneficiaries of the trust, and not for himself.

Madam Justice Prowse made this decision in Graham v. Smith, 2008 BCSC 348, after hearing two appeals from the Registrar’s decisions.

This decision makes estate planning with land easier. You can transfer land into a trust during your lifetime without paying the land transfer tax (one percent of the first $200,000 and two percent of the amount by which the value of the land exceeds $200,000). You do need to keep in mind the potential tax issues that may arise under the Income Tax Act.

On your death, your executor will have to probate your will to deal with your land. But the executor will save probate fees on the value of the land, because your interest in the land at death may be nil.

[Please see my disclaimer at the beginning of this post. The process I have described no longer works. This decision has been reversed by the B.C. Court of Appeal.]

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