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.