Saturday, February 20, 2021

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 Actwhich 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.

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