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Tuesday, June 23, 2009

The "Avoiding Probate at all Costs" Issue

One of the questions that I am asked on a regular basis is how to avoid probate. The concept of avoiding probate is raised in articles and blogs all over Canada and it is usually promoted as something we should all try to do. The reason given for avoiding probate is that probate fees can be high. The usual advice is to put property into joint names (usually with your children) to circumvent the probate process.

This is where people need to stop and consider the facts. In Alberta, we have the lowest probate court fees in the country. The highest your probate fee can be is $400, no matter how many millions of dollars are in your estate. If you are reading articles that say that probate fees will run into the tens of thousands of dollars, the article is probably written in Ontario or British Columbia, where probate fees are a percentage of the estate and are very high.

Having established that the number you are working to avoid is $400, you need to think about what you are risking by putting your property into joint names with your children. While having property in joint names between husband and wife is usually a good idea, I almost never advise putting it in joint names with your children.

Consider the case where Mr. and Mrs. Smith put their home in joint names with their son, Joe. They do this only to avoid probate at some future time. A few years later, Joe gets divorced from his wife. Legally, he is just as much an owner of the Smiths' home as they are. Now they risk losing their home and tens of thousands of dollars in equity because they tried to avoid paying a $400 court fee.

Unfortunately, quite a few people have already taken this step without legal advice. I rarely give a presentation without someone approaching me afterward to say they have already put their home in joint names with their children and asking whether it was a good idea. I do not mean to say there is never a good reason for putting assets in joint names with children, but in my opinion, if it is done solely to avoid probate, it may not be the best solution when balanced against the risk.

Before putting your assets - either real estate or investments - into joint names with your children, find out the facts and the risks by talking it over with an experienced estate planning lawyer. The whole idea behind estate planning is to set things up so that they run smoothly and give you peace of mind, and putting joint names on property may do just the opposite.

2 comments:

  1. What are the implications for me and my elderly parents of purchasing or jointly owning their home. I am single and will remain so so joint assessts with are partner will not be an issue.

    ReplyDelete
  2. Hi. Thanks for your question.

    When you and your parents are deciding whether or not to put your name on as a joint owner of their home, it's a matter of weighing risk against benefit. Everything you decide in estate planning boils down to that.

    What are the risks?
    For you, the risks are minimal, as you are not the one who financed the asset in the first place. It's not where you live (as far as I know). So if for some reason the property were to be lost, you wouldn't lose your home or a significant portion of your assets.

    Your parents, however, stand to take a pretty big hit to their finances should the property be lost.

    As you've stated, there is no spouse and therefore no potential divorce to worry about. That's a big risk removed.

    However, there are other ways in which you could inadvertently cause your parents' home to be lost. For example, you could cause a major car accident in which you are being sued for millions. You could give a personal guarantee for a business venture which fails. Either of those situations could cause creditors to go after all of your assets, including your parents' home.

    Another downside for your parents is that if your name is on the title as a joint owner, they can't sell or mortgage their home without your written consent. That means a loss of control and independence for them.

    What are the benefits?
    You haven't mentioned whether you are an only child or not. If you are, you are likely the person who is going to inherit the house in any event. Putting the house in joint names with you might avoid the need for getting probate from the court, but that's only the case if your parents have no other assets.

    If there are investments,a fairly large bank account, a cabin, mineral rights or any business interests, the executor will have to apply for probate anyway.

    In other words, if the house is being put in joint names just to avoid probate, that may or may not be effective, depending on what else is in your parents' estate.

    If you are not the only child and your parents want to treat all of the children equally, and you get the house, there has to be enough in your parents' estate to give the other children an amount equal to the value of the house. For most people, that's not possible.

    I hope this answer gives you the information you need.

    Lynne

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