Using Two Wills to Minimize British Columbia Probate Tax

 In British Columbia when a will is probated, or in other words proved, the personal representative is required to pay probate tax. The legislation imposing this tax is called the Probate Fee Act, but the fees are really a tax. The tax is calculated on the value of the estate, at a rate of approximately 1.4 percent (I am simplifying a little). If the will maker was ordinarily resident in British Columbia at his death, then the tax applies to real estate and tangible property in British Columbia (such as cars, furniture and art), and his worldwide intangible assets (such as money, stocks and bonds).

There are various techniques used to avoid or minimize probate fees, some of which are well thought out, and some of which are ill advised. Many of these techniques centre around minimizing the wealth that is dealt with under a will, so that the value of the estate is small. For example, spouses may hold their house, bank accounts and investment accounts jointly with a right of survivorship, so that on the death of one, the survivor becomes the sole owner, and the will of the first to die either does not need to be probated, or if the will is probated, the jointly held assets do not need to be listed as part of the estate, and may be excluded form the calculation of probate tax. Trusts are also employed to minimize probate tax.

One technique that has become more popular in British Columbia since changes in our succession legislation in 2014 is the use of two wills dealing with British Columbia. The idea is for the will maker to have two wills, one governing assets for which a grant of probate is necessary for the will-maker’s executor to deal the assets, and the other governing assets for which no grant of probate is required.

For example, supposing the will-maker’s main assets are a house owned solely by the will-maker, which is worth $2 million, and shares in a company that are worth $10 million. If he has a will dealing with all of the assets, on his death when the will is probated, the probate tax will be approximately $168,000. The executor will need to probate the will in order to obtain title to the house to either transfer it to a beneficiary or sell it to pay debts and expenses, and distribute the balance of the proceeds to the beneficiaries. But it might not be necessary to obtain probate to deal with the shares of the company if the will-maker is the only shareholder, or if there is a small group of shareholders and the company’s directors will agree to transfer the shares to the executor without a grant of probate. I am assuming that the shares are not traded on a stock exchange. The difficulty is that the executor cannot pick and choose which assets to disclose when applying for probate: the executor must swear an affidavit setting out all of the assets that pass to her as the executor.

The two-will strategy involves making a separate will that deals only with the shares of the company, or perhaps including some other assets which can be dealt with by the executor without a grant of probate. The other will deals with the other assets, for which a grant of probate is or may be required. Different terminology may be used, such as “primary will” and “secondary will,” or “general will” and “restricted will,” but for simplicity I will refer to the will dealing with shares as the “corporate will,” and the other will I refer to as the “general will.” In this example, if the shares are dealt with in the corporate will, and only the general will needs to be probated, the probate fees will be approximately $28,000, a saving of $140,000.

This two-will technique has been popular in Ontario longer than in British Columbia. In British Columbia we rely on the wording of section 122 of the Wills, Estates and Succession Act, which says that an applicant for a grant of probate or administration must disclose information about the property of the deceased person and the value of the property “that passes to the applicant in his or her capacity as the deceased person’s personal representative….” The probate tax is then calculated on the basis of the value of those assets. For this to work, the executor of the general will must be a different person from the executor of the corporate will, so that the executor of the general will may swear an affidavit that excludes the shares in the corporate will. Otherwise, the property in the corporate will also pass to the same personal representative, and she will have to list the shares of the company, which defeats the purpose.

One downside is that the will-maker needs to name more people to act as executors and alternate executors to ensure that the same person is not the executor of both wills.

I find drafting two wills to be challenging, and there are a number of pitfalls that need to be avoided.

First, the order in which the wills are signed is important. The corporate will should be signed first and this needs to be documented either in the will or a memorandum, or better yet both. This is because the executor of the probated will need to swear that it is the last will.

Second, the standard revocation clause in the general will must be modified so that it does not revoke the corporate will.

Third, the assets in each will must be carefully defined so that it is apparent which assets are governed by which will, and that assets for which a grant of probate is required are clearly excluded from the corporate will so that it does not become necessary to also probate the corporate will.

Fourth, consideration should be given to which debts are to be paid out of the assets governed by the general will, and which debts are to be paid out of the corporate will. This is less tricky if the beneficiaries of each will are identical, but is more complex if there are different beneficiaries in each will. For example, if the will-maker wishes for one child who is expected to take over the business to receive all or most of the assets in the corporate will, while other children receive more under the general will, the will-maker will likely want to ensure that taxes and other expenses attributable to the property governed by the corporate will is ultimately borne by the beneficiary or beneficiaries of the corporate will, and not the beneficiaries of the general will.

Fifth, while the executors of the two wills must be different persons, they must also be able to work well together to deal with such issues as filing tax returns.

There are not many reported cases in British Columba dealing with the use of two wills to minimize probate tax at the time I am writing this post, but in one case Master Wilson (now Mr. Justice Wilson) held that it is permissible to apply to probate only one of two wills, which lends support to this strategy. The case is Berkner (Estate), 2017 BCSC 619.

Ontario Divisional Court Overturns Decision in Re Milne Estate

On January 24, 2019, the Ontario Superior Court of Justice, Divisional Court overturned the decision of the Application Judge in Re Milne Estate. The Divisional Court decision is reported at 2019 ONSC 579 (CanLII). The Application Judge’s refusal to provide Certificate of Appointment of Estate Trustee for two wills in the context of  the use of multiple wills in estate plans caused significant concern among estate-planning lawyer, particularly in Ontario, because if upheld the implication of the decision was that many estate plans would fail to achieve the goal of minimizing probate fees in respect of shares in private companies and other assets that could be dealt with without a grant of probate. The use of multiple wills is also becoming increasing popular in British Columbia.

In my previous post on the Application Judge’s decision, I described the use of multiple wills to minimize probate fees as follows:

Using two wills to minimize probate fees has been popular in Ontario for quite some time, and has grown more popular in British Columbia since the Wills, Estates and Succession Act came into effect. The idea is that the will-maker makes one will in which she deals with those of her assets that can be dealt with by her executor (or “estate trustee” in Ontario), without a grant of probate. The most common type of asset is shares and shareholder loans in closely held companies. There is then another will in which she deals with those assets, such as real estate, publicly traded shares and investment accounts for which probate will be required for the executor to deal with the assets. Both Ontario and British Columbia charge probate fees based on the size of the estate. By using a separate will for the closely held companies, there may be significant savings if the will does not need to be probated.

The Application Judge’s decision and reasoning is succinctly summarized by Associate Chief Justice Marrocco:

[1]               John Douglas Milne and Sheilah Marlyn Milne died on the same day. Each died testate having executed mirror Primary and Secondary Wills. Each Primary Will was submitted to the Ontario Superior Court along with applications for a Certificate of Appointment of Estate Trustee with a Will Limited to the Assets in the Will (“Certificate of Appointment”). 

[2]               After calling for and considering submissions by the Estate Trustees, the Application Judge, in Milne Estate (Re), 2018 ONSC 4174 (CanLII), held that both Applications should be denied on the following basis:

•        A will is a trust.
•        The “three certainties” required for a valid express trust are applicable to the wills, such that the Allocation Clause found in the Primary Wills results in uncertainty of subject-matter because each clause fails to identify the deceased’s property to which  it applies;
•        The inquisitorial jurisdiction of the Court in matters of probate allows for a declaration of invalidity to be made in such circumstances.

The wording of the clauses is as follows:

[8]               The Primary Wills read:

•        THIS IS THE PRIMARY WILL of me…with respect to the disposition of all property owned by me at the time of my death EXCEPT:
 (f) any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for the transfer or realization thereof
 as to which I am making my Secondary Will on the same date as this Primary Will. With the exception of the said Secondary Will, I revoke all previous wills.

 [9]               The Secondary Wills read:

•        THIS IS THE SECONDARY WILL of me…with respect to the disposition of all property owned by me at the time of my death INCLUDING:
 (f) any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for the transfer or realization thereof
 as to the remaining assets of my Estate I am making my Primary Will on the same date as this Secondary Will. With the exception of the said Primary Will, I revoke all previous wills.

Mr. Justice Marrocco discussed the use of two wills and the implications of the Application Judge’s decision:

[21]           The use of Primary and Secondary Wills is often used to reduce tax payable pursuant to the Estate Administration Tax Act, 1998, S.O. 1998, c. 34, to avoid the delay associated with obtaining a Certificate of Appointment or preserve privacy in respect of certain assets.

[22]           Because a testator often executes their Last Will and Testament several years in advance of death, it is often not practical to provide a definitive list of assets which will require or do not require a Certificate of Appointment to be transferred or realized at the time the Primary and Secondary Wills are executed. To overcome this practical problem, estate planning lawyers often provide estate trustees with the power to determine whether a particular asset requires a Certificate of Appointment upon administering the will. These clauses are often referred to as allocation clauses. The use of allocation clauses is a common estate planning technique. See Martin Rochwerg, Miller Thomson on Estate Planning, (Toronto: Thomson Reuters Canada, 2018), at p. 2-57. 

[23]           The position taken by the Application Judge in the Order therefore has a significant and wide-ranging adverse impact upon the use of such clauses in multiple wills, thereby affecting the estate plans of many individuals in Ontario.  For this reasons [sic], the Toronto Lawyers Association sought and was granted Intervenor status in these appeals.

It should be noted that in a subsequent decision, Re Panda Estate, 2018 ONSC 6734 (CanLII), Mr. Justice Penny did not follow the Application Judge’s decision in Re Milne Estate. I wrote about Re Panda Estate here.

The Division Court rejected the notion that a will is a trust. Mr. Justice Marrocco wrote,

[33]           The Application Judge cited no authority in support of the statement that a will is a trust.  I agree with Mr. Justice Penny that this is an error of law.

[34]           A will is an instrument by which a person disposes of property upon death. See Albert H. Oosterhoff et al., Oosterhoff on Wills, 8th ed. (Toronto: Thomson Reuters, 2016) at p. 107. There are of course formalities of execution, but they are not raised in this appeal. 

[35]           A will may contain a trust, but this is not a requirement for a valid will.

Even if a will is a trust requiring that the subject matter, or property, is certain, the primary will is sufficient certain, because it may be identified on an objective basis. As written by Mr. Justice Marrocco:

[49]           The property in the Primary Wills can be clearly identified because there is an objective basis to ascertain it; namely whether a grant of authority by a court of competent jurisdiction is required for transfer or realization of the property.  As a result, the Executors can allocate all the deceased person’s property between the Primary and Secondary Wills on an objective basis. 

[50]           The personal representatives are instructed to ascertain if a Certificate of Appointment is required in order to transfer or realize the asset (which can be done by consulting the institution concerned), and then categorize the asset in one of the wills according to that objective criterion. 

[51]           Finally, if the Executors mistakenly allocate property due to a misunderstanding concerning the necessity of obtaining a Certificate of Appointment, their error is unrelated to the description of the property that is to be the subject-matter of the trust.
[52]           Accordingly, I am satisfied that the subject-matter of the Primary Wills is certain.

In the result, the estate trustees are entitled to receive the Certificates of Appointment.

Panda Estate

I wrote about the Ontario decision in Re Milne Estate, in which Mr. Justice Dunphy refused to grant probate in respect of two wills on the grounds that in his view they were void for uncertainty of subject matter. A husband and wife each made two wills, one intended to deal with those assets for which an estate grant was required, and the other for which no grant would be required for the estate trustee to deal with the assets.

I described this two-will strategy to reduce probate as follows:

The idea is that the will-maker makes one will in which she deals with those of her assets that can be dealt with by her executor (or “estate trustee” in Ontario), without a grant of probate. The most common type of asset is shares and shareholder loans in closely held companies. There is then another will in which she deals with those assets, such as real estate, publicly traded shares and investment accounts for which probate will be required for the executor to deal with the assets. Both Ontario and British Columbia charge probate fees based on the size of the estate. By using a separate will for the closely held companies, there may be significant savings if the will does not need to be probated.

In my post, I was critical of the reasoning in Re Milne Estate.

In a subsequent decision, another Judge of the Ontario Superior Court of Justice declined to follow Re Milne Estate. In Re Panda Estate, 2018 ONSC 6734 (CanLII), Mr. Justice Penny granted a Certificate of Appointment of Estate Trustee in respect of one of two wills. In Panda Estate, the will-maker had made two wills: a primary and a secondary will. The Secondary Will defined the secondary estate to include shares in two companies, and “any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction in not required for the transfer, disposition or realization thereof.” It also permitted the secondary estate trustee to disclaim any assets, which would then be administered pursuant to the primary will. If the reasoning in Re Milne were applied, then the primary will would be void for uncertainty of subject matter.

However, Mr. Justice Penny did not agree with the reasoning in Re Milne Estate. First, Mr. Justice Penny did not consider it appropriate to the Court sitting as a court of probate to engage in “matters of broad construction.” The functions of the court in probate and interpretation are distinct. He wrote:

[17]           It seems to me, although law and equity are now fused in the Ontario Superior Court of Justice, it remains nevertheless important to keep the probate and construction functions analytically distinct, if for no other reason than to align the scope and nature of the review being undertaken with the specific judicial function being exercised at that stage of the proceedings: Oosterhoff on Wills, 8^th ed.  The distinction is also important because the rules that govern the admissibility of evidence differ in the two courts.  A probate court may admit direct evidence of the testator’s intention when proving the will.  But, apart from limited circumstances, a court of construction does not admit such evidence: see pp. 244 - 246.

[18]           In my view, the question of the validity of the conferral of the authority to decide under which of two wills (the probated will and the non-probated will) the property of the deceased will be administered, and the effect of the answer to that question on the administration of the estate, are matters of broad construction which ought not to be dealt with in the context of an application for probate per se.

Secondly, Mr. Justice Penny did not agree with the assertion that a “will is a trust.” He wrote,

[20]           Not one of the authoritative texts on wills asserts that a will is a trust.  Not one of these texts, when setting out the criteria for a valid will, cites the necessity to satisfy the requirements for the creation of a valid trust; that is, the “three certainties.”  Rather, to establish validity for purposes of probate, a will must conform to certain formal requirements (noted above), provide for distribution or administration of property and take effect upon death.  Nor am I aware of any judicial precedent which concludes that a will is invalid because it, being a trust, failed to satisfy the three certainties.

[21]           A will is a unique instrument.  A will shares some of the attributes of a contract and some of the attributes of a trust but it is neither; a will is its own, unique creature of the law.

[22]           Wills frequently create or otherwise employ trusts, to be sure.  When they do, the three certainties will no doubt be relevant to the validity of the trust.  The invalidity of the trust element of an otherwise valid will, however, is not coequal with the invalidity of that will.

Mr. Justice Penny suggested that the real issue in these cases is whether a direction to trustees to determine whether a grant is required to deal with assets is valid. Because it was unnecessary to decide this question on the application before him, he did not rule on this issue. His comments, though, suggest that it is likely valid. He wrote:

[29]           The estates bar is not of one mind on how to draft provisions that facilitate reduction of estate administration tax by placing one set of the testator’s assets under a will intended for probate and leaving another set of assets to be administered without the need for probate.  While, as some commentators argue, detailed lists are preferable in terms of certainty, they can become problematic when certain assets take on a different form between when the wills are drafted and the testator’s death.  To deal with this problem, some suggest consideration be given to adopting language of the very kind used in this case.  This would balance the desire to maximize opportunities for reducing estate administration taxes with the desire to avoid language which is “circular” or “too vague” (such as describing non-probate assets as “those not requiring probate at the time of death”).

[30]           Where the detailed list approach is used, others recommend, to deal with the situation where an asset in the non-probate will turns out to require probate, including a clause that entitles the estate trustees of the secondary will to renounce their interest in that asset, causing it to fall into the general will with respect to which probate will be sought.

[31]           In the circumstances of this case, it is not at all clear to me that a direction from the testator about how the estate trustees should decide whether or not to seek probate in respect of two or more wills dealing with particular components of the deceased’s property, is any more extreme or “uncertain” than other, well-established discretionary choices frequently conferred on and exercised by estate trustees.  Directing the estate trustees to determine whether a grant of authority by a court of competent jurisdiction is or is not required for the transfer, disposition or realization of property, and to act on that determination in their administration of the estate, arguably provides to the estate trustees an objective, ascertainable basis for the exercise of whatever “discretion” is embedded in that conferral of authority.

In my view, the reasoning in Re Panda Estate is preferable to that in Re Milne Estate. I hope that if this issue arises in British Columbia, our courts will follow Re Panda Estate.

Re Milne Estate

[The decision I discuss below had been overturned on appeal. Please see my post on the appeal here.]

I suspect that a recent decision from the Ontario Superior Court of Justice is causing some consternation among the Ontario estate planning bar. In Re Milne Estate,/ 2018 ONSC 4174, the Court held that a will was void for uncertainty of subject matter and could not be admitted to probate. The effect of the decision was to frustrate a two-will estate planning strategy to minimize probate fees. In understand that the decision is under the appeal, and I would argue that the reasoning is fundamentally flawed. But it does highlight the risks of using a multiple-will strategy to reduce probate fees.

Using two wills to minimize probate fees has been popular in Ontario for quite some time, and has grown more popular in British Columbia since the Wills, Estates and Succession Act came into effect. The idea is that the will-maker makes one will in which she deals with those of her assets that can be dealt with by her executor (or “estate trustee” in Ontario), without a grant of probate. The most common type of asset is shares and shareholder loans in closely held companies. There is then another will in which she deals with those assets, such as real estate, publicly traded shares and investment accounts for which probate will be required for the executor to deal with the assets. Both Ontario and British Columbia charge probate fees based on the size of the estate. By using a separate will for the closely held companies, there may be significant savings if the will does not need to be probated.

In Re Milne Estate, the Court considered wills made by two spouses, John Douglas Milne, and Sheilah Marlyn Milne, who both died on October 2, 2017. Their wills are described in the reasons for judgment as follows:

[2]           In the present case, each testator created two materially identical wills. The Primary Will settled upon the executors “all property owned by me at the time of my death EXCEPT…. [certain named assets and] any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for a transfer or realization thereof” [emphasis added].  The Secondary Will, expressly not revoking the first, settled upon the executors “all property owned by me at the time of my death INCLUDING … [certain named assets and] any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for the transfer or realization thereof”. 

After their deaths, the Primary Wills, the ones dealing with assets for which probate would be required, were submitted for probate.

The Court determined that in each case the Secondary Will is valid, and the Primary Will is invalid.

The Court’s reasoning is based on the proposition that a “will is a from of a trust.” No authority is cited, and I have never read or heard that before. A will may be used to create a trust, but I don’t think that is the same thing as saying that a will is a form of a trust.

The Court then reasons that trust must meet the three certainties of intention, subject matter, and objects. In this case, the Court found that the primary wills were void for uncertainty of subject matter. As set out in paragraphs 21 through 23:

[21]        The Estate Trustees urge me to find that there is no uncertainty arising from clause (f) of each of the Primary Wills because the “excluded assets are sufficiently defined in the Primary Will to permit their identification by the Estate Trustees”. They submit that there is no discretion of the Estate Trustees involved because they must determine which assets do not require a Certificate and “[t]hose assets are then not governed by the Primary Wills”.

[22]        The three certainties necessary for a valid trust must be satisfied at the time the trust is created – in this case, at the time of death. It is not enough to say that the assets subject to the trust will be determined later and will then be governed by one will or the other. There is no requirement to probate a will. Whether the trustees decide that a Certificate is necessary or desirable to dispose of a particular asset is a matter of their discretion and is not ascertainable by objective criteria ascertainable in advance. Bank X may decide not to accept anything less than a Certificate in order to authorize the Estate Trustees to deal with a bank account of the deceased, for example, while Bank Y may be satisfied with a certified copy of the will appointing them. 

[23]        The Estate Trustees in this case urge me to find valid a will that confers upon them the discretion to determine retroactively whether any particular assets are included in it. Inclusion of all assets in a trust subject to the power to exclude all of them – as has been attempted here – is no different than conferring the power upon the Estate Trustees to determine which if any assets will be subject to the trust. The testator must settle upon the Estate Trustees assets that are specifically identified or are objectively identifiable by reference to the intention of the testator and not the subsequent decision of the Estate Trustees.

I don’t take issue with the assertion that the subject matter of a trust must be certain as at the time of the trust’s creation. However, it does not follow that the assets must be known at the date of death. They must be ascertainable by objective criteria, but that is not the same thing as saying that the assets must be ascertained on death. An executor must often investigate to determine what assets are part of an estate. In this case the estate trustees might not immediately know if an asset fell under the primary will, but it is still ascertainable.

Nor do I agree that conferring a power of appointment on an executor to select assets to comprise a trust renders a trust void for uncertainty of subject matter. Wills commonly contain provisions allowing an executor to allocate the specific assets among beneficiaries, which may include a portion of the estate to be held in trust. 

Most fundamentally, the Court conflated the functions of a court of probate and a court of construction, although this was brought to the Court’s attention. The Court addressed this issue as follows:

[18]        The applicants submit that I needn’t concern myself with construction of the will and that any ambiguities regarding the property subject to the will can be dealt with in due course by way of application by the executors for directions. Citing Feeney’s Canadian Law of Wills, (James MacKenzie, Feeney’s Canadian Law of Wills (Toronto: LexisNexis Canada, 2000)) and Oosterhoff on Wills (Albert J. Ooserhoff, C. David Freedman, Mitchell McInnes and Adam Parachin, Oosterhoff on Wills, 8^th ed. (Toronto: Thomson Reuters Canada, 2016)), the applicants urge upon me that the probate function of the court is a separate and distinct function from the construction function. The former is concerned with the question of whether there is a will, the fact of its contents and the validity of the process of its execution. The latter concerns the interpretation of the contents of the will and the intentions of the testator with respect to his or her property.

[19]        The Court of Appeal has recently reviewed and succinctly summarized the role of the court in relation to probate proceedings in the case of Neuberger v. York, 2016 ONCA 191 (CanLII). The jurisdiction of the court is not simply to adjudicate a dispute between parties. The court’s role is inquisitorial and the court’s function and obligation is to ascertain and pronounce what documents constitute the testator’s last will and testament:  Neuberger at para. 68. 

[20]        It follows from this that I am both required and entitled to examine the validity of the will where questions as to same arise from an ex facie examination of the will itself or the evidence filed in support of the application for a Certificate. If the will is invalid on its face, a Certificate may not issue. In the present case, questions as to certainty of subject-matter are raised by the language of the will itself. These are questions that go to the essential validity of the will in question. Such questions, should they arise, are appropriately examined at the probate stage.

The distinct functions are well established, and I fail to see how the Neuberger decisions assist. Yes, the courts have an inquisitorial role, but they are still required to follow and apply the principles of probate law. If a will-maker has capacity, the will meets the formal signing and witnessing requirements of validity, and the will-maker acted freely, and knew and approved of the contents of the will, then the will is admitted to probate. The will might create trusts or may contain gifts that are invalid, but that does not affect the ability of the executor to obtain a grant of probate. Even if all of the gifts in a will were determined to be invalid, the executor would still be entitled to a grant. In such a case, there might seem to be little point to obtaining the grant of probate, but in some cases it would still make sense for the executor to do so in order to confirm her authority to deal with the estate.

I hope this decision will never be followed in British Columbia. But I do think it worthwhile for planners to be a bit more conservative. First, I think a two-will strategy requires a great deal of care and attention. I am concerned that the multiple-will strategy to reduce probate fees has become a bit of the flavour of the day in British Columbia, and is sometimes used when the amount involved does not warrant the complexity. Secondly, I suggest that where it is used, it would be wise to specifically identify the assets that are subject to the will that is not intended to be probated. The will that is not intended to be probated can identify the closely-held companies to which it applies, and use language to include successor companies. The other will, which will be probated, may then exclude those assets.

Supreme Court of B.C Decision Lends Support to Use of Multiple Wills to Reduce Probate Fees

A recent Supreme Court of British Columbia decision has lent support to the strategy of reducing probate fees by making two wills in British Columbia, one that deals with those assets that may be transferred to your personal representative without a grant of probate, and the other that deals with assets requiring a grant of probate. This strategy of probate fee reduction has been successfully employed in Ontario, and because of wording changes to the legislation in British Columbia when the Wills, Estates and Succession Act came into effect, is utilized more frequently in British Columbia. 

Suppose you own shares in a company that is not traded on a stock exchange, and the company is used for a family business. Let’s say your interest in the company is worth $10 million. You also have a house in your own name, worth $700,000 and some investment accounts worth $1 million. You then have two wills, one of which deals with your interest in the company (we will call it the “Secondary Will”), and the other which deals with your other assets, including your home and investment accounts (the “Primary Will”). You name a different executor in each of the wills (an important detail in British Columbia). 

On your death, your executor of your Secondary Will does not apply for probate; the shares may be transferred into his name as the executor without a grant of probate. But the executor of your Primary Will, for which a grant of probate is required to transfer the assets into her name as executor to deal with them, probates that will. The executor of the Primary Will pays probate fees on those assets, but not the company. If the executor of the Primary Will is not required to pay probate fees on your interest in the company, and the executor of the Secondary Will does not need to probate the Secondary Will, then this will save $140,000 in probate fees (really a probate tax if the government were honest about it), when contrasted to the probate fees if you had only made one will.

In reasons for judgment issued on April 13, 2017, in Berkner(Estate), 2017 BCSC 619, Master Wilson held that an executor of a will dealing with some of the will-maker’s assets, the Primary Will in our example, without applying to probate the Secondary Will.

Master Wilson set out the background as follows:

[1]             Norman Frank Berkner (the “Deceased”) died on February 24, 2016. He was predeceased by his spouse and left one child, the applicant, Shelley Dorothea Berkner.

[2]             The Deceased’s estate plan utilized two wills, both dated January 28, 2016. The applicant is the executor under what is referred to as the Primary Will, but is not the executor under the Secondary Will as she renounced her executorship. The executor under the Secondary Will is an accountant, Mr. Robert L. Gruber.

[3]             This application is for a grant of probate of the Primary Will only.

[4]             The Secondary Will identifies those assets that comprise the Secondary Estate at paragraph 4(g) which provides as follows:

Definitions

4.   In this Will:

      (g)  “Secondary Estate” means collectively:
            (i)   all Private Businesses;
            (ii)  any assets held in trust for me by the Private Businesses;
            (iii) any beneficial interests I may have in any trust for which a Grant is not required for a transfer or realization;
            (iv) any interest I may have in any real property for which a Grant is not required for the transfer or realization;
            (v)  all articles of personal household and domestic use or ornament belonging to me at my death for which a Grant is not required for a transfer or realization;
            (vi) any amounts owing to me from my children; and
            (vii)      any other assets for which my Secondary Trustee determines a Grant is not required for a transfer or realization;
            but excludes my property comprising my Primary Estate; provided that my Secondary Trustee may exclude an asset from being part of the Secondary Estate, in which case it shall become part of the Primary Estate;
      (h)  “Private Businesses” means and includes all securities of private companies or partnerships (which, without limiting the generality of the foregoing, shall include shares, bonds, debentures, notes, receivables, book entries, amounts owing to me, investments in and all other interests in private companies) I may own legally or beneficially at the time of my death and “private companies” for the purposes hereof including, but not limited to, the following:
            - Berkner Egg Farms Ltd.;
            (the “Company”), and any company which is a successor to the Company, or has amalgamated or as a result of any reorganization become a part thereof, and does not include any shares or other interest I may own of a publicly traded company;

[5]             I understand the deceased’s interest in Berkner Egg Farms Ltd. to have significant value.

[6]             All of the deceased’s assets that do not form a part of the Secondary Estate fall under the Primary Will. Although this application is for probate of the Primary Will, no application has been brought, and I infer no application is contemplated, for probate of the Secondary Will. The applicant applied for probate of the Primary Will by way of desk order in the ordinary course, but the Registry required that the matter be spoken to, a process contemplated by Rule 25-4(6)(b) of the Supreme Court Civil Rules.

[7]             The applicant submits that she should be granted probate of the Primary Will because:

a)    a will maker is permitted to make more than one valid will;
b)    a personal representative is not required to probate a will;
c)     in the absence of any rules or legislation that prevents multiple wills or requires that all wills be probated, she is entitled to the order sought.

[8]             For the reasons set out below, the applicant is granted probate of the Primary Will.

Master Wilson agreed with the applicant, represented by Geoff White, that a will-maker may make more than one will, and there is no requirement to probate a will. In granting the application to probate the Primary Will, without applying for a grant of the Secondary Will, Master Wilson applied the Ontario decision in Granovsky Estate v. Ontario, 1998 CanLII 14912, as follows:

[18]         The applicant says that since multiple wills are permitted at common law and there is no obligation on the part of Mr. Gruber to apply for probate of the Secondary Will, the applicant is entitled to the order granting her probate of the Primary Will.

[19]         In Granovsky, the dispute was between the administrator of the primary will and the Province of Ontario on the question of whether probate fees were payable on the entire estate. At paras. 23 and 26 of Granovsky, the court considered the legislative scheme in Ontario and concluded that multiple wills are permitted in Ontario, that limited grants of probate are available and there was no need to probate the second will:

23.        The estate planning of having multiple Wills in the form of a Primary Will and a Secondary Will which take effect on death is, in my view, simply another example of how a careful testator plans to have her or his estate pay the least possible probate fees on death. There is no legal obligation to obtain probate and, as I have noted above, limited grants are permissible. If the directors of the private companies in which the deceased owns shares or has an interest at death do not require the formal grant from the Court to deal with the transmission of the assets and are prepared to deal with the estate trustees named in the Secondary Will, why then should the estate have to pay probate fees on those assets?
…
26.       … In my view, there is no legislative prohibition against asking the Court for a limited grant of the deceased's Primary Will and I find that there is no requirement for the Estate Trustees to submit the deceased's Secondary Will to probate or to pay probate fees on the value of the assets governed by it.

[20]         The question of probate fees is not before me on this application, and no notice of this application was provided to the Province of British Columbia.

[21]         Turning to the legislation of this province, I find support for the applicant’s position that she be entitled to a grant of probate over what amounts to only a portion of the deceased’s estate can be found in s. 136 of the Wills, Estates and Succession Act, S.B.C. 2009, c. 13, which states:

136      A representation grant, whether or not power is reserved to another person to apply for a subsequent representation grant, gives to the personal representative exclusive authority to administer the estate or that part of the estate to which the representation grant applies in accordance with its terms.
[Emphasis added]

[22]         In my view, this section contemplates that a grant may be issued for something less than the entirety of the deceased’s estate.

Subject to Master Wilson’s comment that the issue of probate fees was not before him on the application, this decision lends support to the view that the multiple-strategy may be an effective way to reduce probate fees on death in appropriate circumstances. That said, I am concerned that the multiple-will strategy has become a bit of the flavour of the day in British Columbia, and there are pitfalls and lots of room for error, but I will save that for other posts. 

The Prescribed Affidavit of Executor in B.C. is Outdated

In British Columbia, one of the forms required in an application for probate of a will, or letters of administration, is an affidavit of executor, with a schedule of the deceased’s assets, liabilities and distribution. This schedule is often referred to as the “disclosure document.”

The form of affidavit required is set out as Form 69, in Appendix A, of the Supreme Court Rules.

The disclosure document requires the executor to state whether an asset is “within” or “without” British Columbia. This is not always as straightforward as it may seem. It is pretty easy to tell if certain kinds of assets such as land are within British Columbia. But it is much more complex to determine if other kinds of assets, such as financial investments, are within British Columbia.

You can distinguish between physical assets, or “tangible assets,” such as cars and tables, from “intangible assets,” such as bank accounts, shares in corporations, and mutual funds. If the deceased owned mutual funds that are made up of securities of companies located all over the world, where are the funds located?

In law, how do you determine whether intangible assets are within or without British Columbia? This question was answered in respect of securities by Mr. Justice Ehrck, in Re: The Estate of Bessie Bloom, 2004 BCSC 70. The securities are situated in the place where “the financial investment intermediary on whose books the interest of the deceased is recorded and where her personal representative must go to effect the transmission.”

To set out whether an intangible asset is within or without British Columbia, the executor will often have to make inquiries of financial institutions to determine where the deceased’s interest is recorded.

What is the point of requiring an executor to say whether an intangible asset is within or without British Columbia? None.

The Probate Fee Act used to provide that British Columbia probate fees were calculated on assets situated in British Columbia (but not on the value of assets situated outside of British Columbia). Accordingly, it made sense to require executors to disclose whether an assets was within or without of B.C. so that the probate fees would be calculated only on assets within British Columbia.

But the effect of the decision in Re: Bloom was to significantly reduce the probate fees the government collected. Many British Columbians hold investments through financial institutions that keep their books recording the interests of their customers in Toronto or other cities outside of British Columbia.

So the Provincial Government amended the wording of the Probate Fee Act so that probate fees were payable in respect of all “intangible personal property of the deceased, wherever situated,” if the deceased was ordinarily resident in British Columbia immediately before death. This was done by amending the definition of “value of the estate” in section 1. (The constitutionality of taxing assets outside of British Columbia is open to doubt, but it has not as yet been challenged.)

Accordingly, now that the probate fees apply to intangible assets of British Columbia residents, irrespective of the location of those assets, there is no point in making the executor find out and disclose whether those assets are within or without B.C.

But in its haste to protect its tax base, the British Columbia did not amend the prescribed form of the disclosure document so that it is in keeping with the information required to calculate the probate fees. I note that new Supreme Court Civil Rules that will come into affect on July 1, 2010, keep the outdated form of disclosure document (Appendix A, Form 91). In fairness, the reform of the Supreme Court Rules was directed toward law suits, rather than estates. The British Columbia Law Institute has a Probate Rules Revision Project. I hope it will look at this issue.

The probate forms could be amended to require the applicant to state whether to the best of his or her knowledge the deceased was “ordinarily resident” in British Columbia immediately before death. The disclosure document would then deal with intangible assets separate from tangible assets. The applicant would disclose whether each of the tangible assets is within or without B.C., but would not be required to state the location of intangible assets.

Michael Jackson's Estate Plan

I don’t know if an estate plan has ever received as much media attention as Michael Jackson’s. Yet, the way he set up his estate plan the media are left to speculate, at least for the time being, on the identity of his beneficiaries. I hope he finally does get some privacy.

Michael Jackson set up a trust during his lifetime. A trust agreement is a private document. It does not need to be filed in court. I assume that he held substantial assets in the trust, but because it is private, I don’t know what assets are in it.

His will was made public. You can look at it here. It tells us the names of his executors, and the names of the people he wished to appoint as guardians of his children. But according to the will, any assets he held in his name at death will go to his private trust. This is sometimes called a “pour-over will.” So we don’t know who the ultimate beneficiaries are.

How well would this plan have worked if Michael Jackson were a British Columbian, instead of a Californian?

Probably not as well.

We do of course have trusts in British Columbia, and well developed trust laws (with the same antecedents in English law as California). You could also do a pour–over will naming the trust as your beneficiary.

The difficulty is with the Canadian income tax system. In Canada if you transfer assets into an inter vivos (or living) trust, you are deemed to have disposed of those assets at fair market value. This may trigger capital gains or other taxes if the assets have increased in value. Furthermore, if you hold the same assets in the trust for twenty one years or more, the trust is deemed to have disposed those assets every twenty one years, again triggering taxes.

There are some exceptions to these tax rules such as alter-ego and joint partner trusts, but you must be at least 65 to set up one of these trusts. Sadly, Michael Jackson was only 50 when he died.

I am not saying that Michael Jackson couldn’t do similar estate planning in British Columbia. He could of course pay the taxes when he transferred the assets into the trust, and as well any deemed dispositions every twenty one years. He could also have transferred assets that do not appreciate much, or perhaps he could have transferred just a nominal amount into the trust. He could leave the other assets in his own name, and do a pour-over will. He might have thereby been able to keep the identity of his ultimate beneficiaries confidential.

But if Michael Jackson’s will were probated in British Columbia, the assets he owned in his name flowing to the executors would have to be listed in a disclosure document exhibited to an affidavit filed in court. This disclosure document would be public.

Furthermore, his executors would have to pay a tax in British Columbia, called probate fees, of about 1.4 percent of the value of the assets passing to the executors when the court issued the grant of probate. (The probate fees would not necessarily apply to all of his assets, but if he were a resident of British Columbia they would apply to his shares of any companies holding his substantial copyright interests.)

Avoiding British Columbia Probate Fees

In British Columbia, when the Supreme Court of British Columbia grants probate (or proof) of a will, the government collects a tax, called probate fees . These probate fees are based on the value of the assets in the deceased estate. I have described it in more detail here, but for the purpose of this article, you can assume that the tax will be approximately 1.4 percent of the value of the assets.

Most people prefer to pay less tax than more. Not surprisingly, people have come up with ways to avoid probate fees. British Columbia probate fees are a most irrational tax. This tax does not apply to all assets owned by the deceased: if the deceased has structured his or her affairs so that assets flow to beneficiaries outside of the estate (will substitutes), no tax is payable in respect of those assets.

Although avoiding probate fees is a popular topic in estate planning in British Columbia, I am critical of many of the things people do, or are advised by other advisers to do, to avoid probate fees. For example, some people will put significant amounts or all of their money into joint accounts bank accounts with right of survivorship with one of their children to avoid probate. The theory is that the parent will control the funds during his or her lifetime, but on death, the account will flow to the child by right of survivorship outside of the estate. Unfortunately, the law in respect of joint accounts is complex, poorly understood (even by the banks), and there have been no end of lawsuits over who really owns the funds in the accounts after the death of one of the account holders.

I have written about the problems that can occur if you put your home or other real estate in a joint tenancy with your children elsewhere, and will not repeat them all here, other than to say in addition to legal problems, joint tenancies can cause tax problems.

My other criticism of some of the techniques used to avoid probate fees, is that sometimes opportunities are missed for tax planning that could save your heirs substantially more money in the long-run than if they save probate fees. For example, creating trusts for your children and their families in your will can save them significant taxes on investment income earned on their inheritances. I have described this in more detail here.

I do not suggest that there are no good ways of avoiding probate fees. There are.

Recently when I was taking instructions to draft a will, I noticed that my clients had many of their investments in segregated funds. Because segregated funds are life insurance products, you can name a beneficiary in an insurance designation and the funds can flow directly to the beneficiary outside of your estate, thus avoiding probate fees. Instead of just naming a beneficiary you can name a trustee to hold the funds for other beneficiaries (see this post). The upshot is that it is possible to both avoid probate fees on the segregated funds, and create trusts for your children and their families to take advantage of testamentary trusts to minimize income tax on investment income for your children.

Sometimes you really do get what you pay for. Unfortunately, there are a lot of people giving free advice about how to avoid probate fees who do not see the bigger estate planning picture. By all means listen to what they have to say, but before you implement any of it, sit down with an experienced estate planning lawyer—one who will insist on going through your circumstances thoroughly, rather than passively implementing what someone else has suggested—and get legal advice. You should also involve your other advisers, including financial planners and accountants, in your estate planning. Each adviser can offer a different perspective.

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.]

Another Joint Tenancy Gone Bad

I entitled one of my earliest posts on this blog “Six Potential Pitfalls Parents Should Consider Before Transferring Real Estate Into a Joint Tenancy with Their Children.” (I have thought of a seventh, but that is not what I am writing about today.) It seems like I am always suggesting to people that they not do it, often after they have received the exact opposite advice from someone else. Sometimes, when I get a phone call from a parent asking me to do the paper work to transfer the title to his or her home to a son or daughter, I send them my article. Usually, after I send my article to the parent, I don’t get instructions to transfer the title. In this way, my article has cost me business. But, I don’t mind.

In a case decided in December, called Schoennagel v. Schoennagel and Gateway Automotive, 2006 BCSC 1830, Daphne Schoennagel did transfer her house into a joint tenancy with her daughter. After her husband died, Daphne Schoennagel moved from 100 Mile House, B.C. to New Westminster, B.C. She bought a house in October 1996, in New Westminster, which she registered in her sole name.

In 1997, her accountant advised her that if she transferred her house into a joint tenancy with her daughter, she could avoid probate fees.

In 2000, Daphne Schoennagel’s daughter prepared a letter for her to sign instructing a lawyer to prepare the documents to transfer the house into a joint tenancy. The lawyer spoke with Daphne Schoennagel on the phone, and then sent her the transfer documents. She signed the transfer before a notary public. The lawyer then had the title transferred into a joint tenancy with her daughter.

Daphne Schoennagel testified that when she transferred the title, she considered that the house was still hers. She agreed to transfer the house into a joint tenancy because at the time, she wanted her daughter to get it on her death. Her daughter did not want to have to pay probate fees on the value of the house on Daphne Schoennagel’s death. (When title is held in a joint tenancy, on the death of one joint tenant, the other acquires title by right of survivorship. In some cases it may not be necessary to probate the will at all, or if it is probated the survivor can avoid paying probate fees in respect of the house.)

Unfortunately, Daphne Schoennagel and her daughter later had a falling out. Daphne Schoennagel sued her daughter for the return of the daughter’s interest in the title to the house. She argued that the transfer should be set aside on the basis of duress, undue influence or as an unconscionable transaction.

Mr. Justice Truscott of the Supreme Court of British Columbia dismissed Daphne Schoennagel’s claim. He found that she intended a gift of an interest in the house when she transferred it into a joint tenancy with her daughter.

Should this have been avoided? I think so. Sometimes people are too quick to blame their advisors when things go wrong. But, in this case, I can’t help but wonder how well Daphne Schoennagel’s advisors served her.

According to the reasons for judgment, Daphne Schoennagel's accountant advised her about avoiding probate fees. How much probate fees would Daphne Schoennagel’s daughter avoid? The answer is about 1.4% of the value of the house on death. It could possibly be more, if there were other assets, and if probate could be avoided altogether. Given the real estate market in British Columbia in recent years, the value is probably substantially higher than the $241,000 Daphne Schoennagel paid for it, but even if it were a worth a million dollars, the probate fees would be $14,000 on that million (assuming there are at least $50,000 of other assets).

What are the other tax implications of the joint tenancy? I don’t have sufficient facts to know for sure, but I am guessing that this house qualifies as Daphne Schoennagel’s principal residence. If she can claim the house as her principal residence until she sells it or dies, any increase in the value of her interest in the house would be sheltered under her principal residence exemption.

On the other hand, her daughter does not live in the house, and probably can’t shelter any of her interest in the house under the principal residence exemption. When she sells her one-half interest in the house, she will have to pay tax on the increase in value of her interest. If it is subject to capital gains tax, one half of the increase of her one-half interest in the house will be taxed as income for the daughter. The amount of tax will depend on the daughter’s marginal income tax rate. The top rate in British Columbia is, last time I checked, about 44%. The income taxes the daughter will eventually have to pay will likely significantly exceed any potential savings of probate fees.

This potential tax problem would likely have arisen even if mother and daughter had not had a falling out. The daughter might have been able to argue that she was holding her interest in the title in trust for her mother all along, and that the full amount of any appreciation in the value of the house should be treated as her mother’s gain. But, I assume that if there were any documents saying that the daughter was holding an interest in trust for Daphne Schoennagel, they would have been brought up at trial, and the outcome would be different.

Did the lawyer or notary public advise Daphne Schoennagel that she would lose control of the house, if she transferred the house into a joint tenancy with her daughter? Did either of them advise her that it could be difficult to get the title back if she changed her mind? Did they advise her of the income tax issues? I don’t know the answers from reading this case. It’s quite possible that they did advise her of the potential pitfalls of transferring the house into a joint tenancy, and that she decided to do so anyway. But too often, people are making decisions to avoid a 1.4% tax without considering the significant implications of what they are doing.

How the Choice of Business Structure Can Affect British Columbia Probate Fees

As I wrote in my October 22, 2005, post here, in British Columbia when a will is probated, the provincial government charges a tax based on the value of the estate assets. The tax approaches 1.4 % of the value of the assets. In my November 27, 2005, post here, I explained that in calculating the value of the assets, the amount the deceased owed on a mortgage (or other security debt) may be deducted from the value of the asset, but unsecured debts are not deductible in for arriving at the value of the estate assets. I gave an example of how this can lead to perverse results with the personal representative of a relatively wealthy person paying less probate fees than the personal representative of someone with greater assets but less net worth.

How the deceased structured a small business can have a significant effect on probate fees. If George owned a clothing store as a proprietorship, with assets worth $1 million, and debts of $500,000 that are not secured against George's assets, then on his death his estate would have to pay probate fees of $14,000 in respect of his clothing store (assuming his other assets were worth at least $50,000).

If instead of owning his clothing store as a proprietorship, George had incorporated a company in which he owned all of the shares, and at George’s death the company owned the clothing store, the probate fees would be lower. When applying to probate the will George’s personal representative would pay probate fees based on the value of George’s shares and shareholder loans owed to George. If the company’s assets were $1,000,000 and the unsecured debts of $500,000 (owing to people other than George), then the value of the company’s assets net liabilities is $500,000. George’s personal representative would then list the value of the shares, which the personal representative could reasonably value at $500,000. The probate fee burden on the estate in respect of the clothing store would then be $7,000 instead of $14,000. Of course, if any of the $500,000 debt were owed to George as a shareholder loan, then the amount of the loan would be an estate asset, subject to probate fees.

Liabilities and British Columbia Probate Fees

In my October 22, 2005 post, “British Columbia Probate Fees," I wrote that the amount of probate fees payable is based on the value of the deceased’s estate. I discussed the basic structure this tax in my earlier post, but did not discuss whether liabilities are deducted from assets in calculating the amount of probate fees. In other words, are probate fees payable on the gross value of the estate assets, without deduction for liabilities, or on the net estate, after the deceased’s debts and other liabilities are deducted from the value of the estate?

For example, let’s assume that Albert dies leaving an estate consisting of a $100,000 bank account, no other assets, and no liabilities. Bob dies leaving an estate consisting of a $500,000 bank account, no other assets, and owes Carl $400,000. Bob has not given Carl any security for the $400,000 debt. We also assume that Albert and Bob were resident in British Columbia when they died and their executors have to apply to probate the wills in order for the banks to release the funds to the executors. Are the probate fees payable on Albert’s estate, and Bob’s estate the same? Principles of fairness may require that the amount of probate fees payable would be the same--but not British Columbia’s Ministry of Finance.

Section 1 of the Probate Fee Act, SBC 1999, c. 4, says that the

"value of the estate" means the gross value, as deposed to in a Statement of Assets, Liabilities and Distribution exhibited to the affidavit leading to a grant or to a resealing, as the case may be, of
(a) the real and tangible personal property of the deceased situated in British Columbia, and
(b) if the deceased was ordinarily resident in British Columbia immediately before the date of death, the intangible personal property of the deceased, wherever situated,
that passes to the personal representative at the date of death.

However, the British Columbia Supreme Court registries allow mortgages registered against the title to land to be deducted from the value of the land when the land and the land’s value are disclosed on the assets section of the Statement of Assets, Liabilities and Distribution. (The statement should show the gross value of the land, the amount owing on the mortgage, and the net value as at the date of death.) Similarly, liabilities that are secured against personal property may be deducted from the value of such assets on the Statement of Assets, Liabilities and Distribution. In practice the “gross value” of an asset that is encumbered by a financial charge means the net value of the asset after deducting the amount owing on that financial charge.

On the other hand, no relief is available for unsecured debts.

Let us add Donald to our example. He dies owning a house in British Columbia worth $500,000 with a mortgage registered against the house. He owes $300,000 under the mortgage, and has no other assets or liabilities.

Accordingly, the net values (after deducting liabilities from assets)of Albert’s estate and Bob’s estate are each $100,000, and the net value of Donald’s estate is $200,000. In addition to the $208 filing fee, Albert’s estate has to pay $1000, Bob’s estate has to pay $6600, and Donald’s estate has to pay $2400 in probate fees. Therefore, Bob’s estate, which is really worth only half of Donald’s estate, has to pay two to three times as much in probate fees to the provincial government.

Does this seem like a fair method of taxation to anyone?

British Columbia Probate Fees

When an executor of a will applies to probate (in other words prove) the will in British Columbia, he or she must pay probate fees before the court will grant probate. Similarly, a person applying to court to be appointed an administrator of an estate (where there is no will or no executor willing and able to act) is required to pay probate fees before the court will grant letters of administration. Probate fees are paid pursuant to, not improbably, the Probate Fee Act, SBC 1999, c. 4. For simplicity, I will refer only to applications for probate, but the same fees apply to applications for letters of administration.

The amount of probate fees is based on the value of the estate assets. There is an initial filing fee of $208. After the application for probate is filed, but before the court registry will release the grant of probate, the executor is required to pay $6 for every $1,000 or part of $1,000 by which the value of the estate exceeds $25,000 up to $50,000, plus $14 for every $1000 or part of $1000 by which the value of the estate exceeds $50,000. Accordingly, for most estates probate fees are a tax approaching 1.4 percent of the value of the estate.

The executor is entitled to take the probate fees out of the estate, if he or she has access to estate funds, or the executor may be reimbursed later from the estate. Raising the money required for probate can be difficult in large estates, with high probate fees.

The Probate Fee Act provides that the executor must pay fees on all real property and tangible personal property of the deceased situated in British Columbia that passes to the executor on death. The Act also provides that “if the deceased was ordinarily resident in British Columbia immediately before the date of death,” the executor must also pay probate fees on “the intangible personal property of the deceased, wherever situated.”

In other words, the executor is not required to pay probate fees on the value of any of the deceased’s land or tangible personal property (things you can touch) situated outside of British Columbia. However, if the deceased was ordinarily resident in British Columbia, the legislation requires the executor to pay probate fees in respect of intangible property such as financial assets even if under common law rules these assets are situated in another province or country. (The Provincial Legislature may have exceeded its constitutional authority in requiring that probate fees be paid in respect of intangible property outside of British Columbia. See Mr. Justice Ehrcke’s analysis in Re: The Estate of Bessie Bloom, 2004 BCSC 70, at paragraphs 31-34.)

The fees are calculated on “the assets and liabilities of the deceased, irrespective of their nature, location or value, which pass to the deceased's personal representative,” all of which the executor must disclose on the disclosure document filed with the application for probate.

Accordingly, the executor does not need to disclose those assets that do not pass to the executor, but pass to beneficiaries outside of the estate; those assets are not considered for the purpose of calculating probate fees. For example, if the deceased had designated a beneficiary of a life insurance policy, the insurance proceeds may pass to the beneficiary outside of the estate, and probate fees are not payable in respect of the insurance proceeds.

However, the disclosure requirements are not limited to those assets registered in the deceased’s name. If another person holds title to an asset in trust for the deceased, and if the deceased’s beneficial interest in the asset passes to the executor, the executor is in my view required to include it in the disclosure document.

In the case of joint bank accounts, if the surviving joint account holder is entitled to keep the proceeds of the account for his or her own benefit, then the account does not need to be included in the disclosure document, and the executor should not pay probate fees in respect of the joint account. On the other hand, if the surviving joint account holder is really holding the proceeds of the joint account in trust for the estate, then the account should be listed as an estate asset, and is subject to probate fees. (See my earlier post “Joint Accounts with Right of Survivorship”).

An executor is only required to pay probate fees if he or she applies for a grant of probate. If the executor is able to administer the estate without applying for probate--and chooses not to apply for probate--he or she does not have to pay probate fees.

Six Potential Pitfalls Parents Should Consider Before Transferring Real Estate Into a Joint Tenancy with Their Children

When the provincial government increased probate fees in British Columbia several years ago, more people became concerned with avoiding probate fees. Unfortunately, sometimes the potential costs and risks of avoidance far exceed any benefit. One method of probate avoidance that concerns me is when a parent transfers real estate into a joint tenancy with his or her child or children, without very carefully considering all of the potential repercussions.

When the parent transfers title to real estate into a joint tenancy with one or more children, on the parent’s death, the surviving child or children may then transfer the real estate into the survivor’s name (or survivors’ names) without probating the deceased’s Will. If in transferring title to a child’s name, the parent intended to make a gift to the child, then on the parent’s death, the child acquires the entire interest in the real estate by right of survivorship, instead of the real estate passing under the parent’s Will. In some cases, it will not be necessary to probate the parent’s Will at all, and in others the parent’s personal representative does not have to declare the value of the real estate in the application for probate in British Columbia for the purpose of calculating probate fees (unless the surviving joint tenant is really holding title in trust for the the parent's estate).

One may contrast a joint tenancy with ownership by two or more people as tenants in common. If two or more people own real estate as tenants in common, and one owner dies, his or her interest pass through his or her estate to the beneficiaries under his or her Will.

Although by transferring the title to real estate into a joint tenancy with a child or children, the parent may save his or her estate some probate fees, there are at least six potential disadvantages.

First, when the parent transfers the real estate into a joint tenancy with children, the children become co-owners. This means that if the parent later wants to mortgage or sell the real estate, the parent must get the children’s permission, and they must sign the mortgage or transfer documents.

Secondly, because the children are co-owners, if a child’s marriage breaks down, that child’s spouse may claim a share of the child’s interest in the real estate.

Thirdly, if any child has financial problems, that child’s creditors may register a court judgment against the child’s interest in the real estate, and then apply to have the real estate sold to pay the child’s debt out of the child’s share. If we are talking about the parent’s residence, this could be devastating.

Fourthly, if the real estate is the parent’s principal residence, the family may lose some of its capital gains exemption after the real estate is transferred into children’s names. If the children have their own principal residences, and the value of the parent’s principal residence increases, they will not be able to shelter any gains in the value of their interests in the parent’s principal residence under the principal residence exemption as defined in section 54 of the Income Tax Act (Canada). This means that they may have to pay capital gains tax when the real estate is sold. In contrast, if the parent keeps his or her principal residence in his or her own name, the parent will not have to pay capital gains tax on the increase in the value of real estate as long as it qualifies as the parent’s principal residence.

Fifthly, if the real estate does not qualify as the parent’s principal residence, then on transferring the real estate into a joint tenancy, the parent may trigger a tax liability that could have otherwise been deferred.

Sixthly, where the parent transfers the real estate into a joint tenancy with two or more children, and one of the children dies before the parent, that child’s share will go to the surviving owners, rather than to that child’s own children. This may be contrary to the parent’s estate plan if the parent would prefer that the deceased child’s own children inherit the share that would have gone to the deceased child on the parent’s death.

There are ways that a parent can minimize some of the risks and costs associated with transferring real estate into a joint tenancy with children, but is important that anyone considering doing this carefully consider all of the ramifications.