What's in an estate anyway?

A reader has asked another good question, this time about what is in an estate, and how the estates of a married couple work together. Here's the question:

"Just how is an 'estate' is defined? Is it the assets and liabilities held by a couple, or by an individual? When the first of my parents passes away, will it be necessary to 'execute' the estate, or will this only happen when the second of them is gone? Their only property (their home) is of course held by the two of them together. It seems a bit ridiculous to have to go through the entire process of executing an estate twice."
Each individual has an estate, which holds all of the assets owned by that individual, as well as his or her liabilities. Sometimes, though, ownership depends on other people, so the individuals can't be completely separated. You have to understand how assets are owned and the effect of the type of ownership.

What does one half of a couple actually own? Let's say the husband jointly owns the home with his wife. He has a life insurance policy that names her, and a RRIF that names her. His bank account is joint with hers. Yes, he owns those assets during his lifetime, but none of them would be included in his estate if his wife were alive. The house and bank account would go to her by right of survivorship, so are not part of the estate. His RRIF and life insurance policy have a direct beneficiary named so they don't form part of the estate either.

How different the situation would be if the same man had the same assets but his wife had already passed away. With no joint owner any more, the house and the bank account are in his name only and are now part of his estate. With no surviving named beneficiary, his RRIF and life insurance would pay to his estate.

Most couples will intentionally set up their financial arrangements to ensure that when the first one of them dies, the other automatically receives assets either by joint ownership or by beneficiary designation. It's significantly more complicated in a blended family of course. If things are properly set up, it's not necessary to deal with the estate when the first one of the couple dies. In fact, there usually is no estate. Only on the death of the second half of the couple does it become necessary to deal with an "estate".

To achieve this proper set-up, the couple must have wills and powers of attorney. They must consult a financial planner, banker, or estate planning lawyer to ensure that they've properly named their beneficiaries on RRSPs, RRIFs, life insurance policies etc. All aspects of their finances must work together.

Your first meeting with the estate lawyer - what to bring, what to expect

Many times an executor has come to his or her first meeting with me loaded down with a cardboard box (or two) crammed full of papers. The explanation is always that the executor didn't know what to bring, so he or she brought everything. That makes sense, but somehow it still ended up that I needed things the executor hadn't brought along. This post is intended to make that first meeting between an executor (or administrator) and the estate lawyer run a little more smoothly.

What to bring:

• paper and pen for taking notes
• 2 pieces of I.D.
• the original will
• a Death Certificate and/or Funeral Director's Statement of Death
• the deceased's I.D.
• the deceased's social insurance number
• the most recent statements from the deceased's bank accounts, investments, RRSPs, RRIFs, TFSAs, LIRAs, DRIPs, loans and lines of credit
• the deceased's last tax return
• if the deceased was paying child support, a copy of the order or agreement to pay the support
• copy of the deceased's life insurance policies
• names and addresses of all beneficiaries named in the will
• names and addresses of the deceased's spouse and children
• the birthdates of any beneficiaries who are minors
• copy of title to the deceased's real estate, or the tax notice for the property

What to talk about:

• a timeline for individual tasks, and for the estate as a whole
• what the lawyer is going to do for you
• which tasks you are going to do yourself
• who the lawyer represents and will speak with
• who is entitled to see a copy of the will
• any possible claims on the estate
• what to do about personal effects in the deceased's home
• what and when the lawyer will charge for fees and disbursements
• paying the lawyer from the estate
• any further paperwork the lawyer needs from you
• any immediate need for cash for the deceased's spouse
• payment of the funeral bill
• opening an executor's bank account
• any of the deceased's assets that are in danger of being lost or damaged
• what to do if the deceased's house is now vacant
• whether you will claim executor's compensation, and if so, when and how much

Make sure before you leave the lawyer's office that you are clear on exactly what you have to do next to keep the estate moving. Open a binder or accordion file to keep estate documents, lists and statements organized.

Who does the estate lawyer act for?

When a lawyer is hired by an executor to handle the legal work for an estate, that lawyer works for the executor. The lawyer's job is to advise the executor on legal matters (and often on estate administration matters too, if the executor is inexperienced). The lawyer carries out legal work such as applying for probate and dealing with disputes. The lawyer can't and won't take instructions from anyone else, not even the beneficiaries of the estate.

This is frustrating for beneficiaries, who frequently wish they had more say in what is happening in an estate. Many lawyers take the position that residuary beneficiaries have a right to be informed about what is going on an estate, and almost all will encourage the executor to communicate frequently with the beneficiaries about progress being made or obstacles encountered in the estate. This still doesn't mean that the beneficiaries get to tell the lawyer what to do.

I can't tell you how many times an irate beneficiary has complained to me that the estate lawyer won't listen to him. Well, when you think about it, how would you like to be doing your job the way you're supposed to, and some person who has no right to tell you what to do calls up and demands that you do what he wants?

This isn't to say that beneficiaries have no control over an estate. They have the power to approve the executor's accounts or withhold that approval. They also have the power to hire a lawyer of their own - either individually or as a group - if they have a dispute with the executor that simply can't be resolved without help.

The lawyer for the estate represents the executor in his capacity as executor. So if the executor is, say, a spouse who doesn't feel that she received enough of the estate and wants to make a claim against the estate, the lawyer won't represent her on that claim. (Hopefully the spouse wouldn't be named as executor in this case, but we all know it happens).

A fair share?

The link below goes to an outstanding article from Forum, a publication of Advocis (the Financial Advisors Association of Canada), November/December 2010 edition. It talks about how Canadian law is changing so that a person with a moral claim on an estate may have a fair share of a deceased's estate even though the deceased deliberately left the person out of the Will.  It's an interesting concept - how much right do we actually have to dispose of our estates the way we want to?

The article contains a table (reprinted from the Canadian Bar Association webpage) that breaks down by province who can make a claim against an estate on the basis of being a financial dependent.

Click here to read the article.

answering your question - adoption

Recently a reader left me a question which I haven't posted due to its length, but I still want to give the reader my comments on it. The gist of the question was whether a person's (let's say Frank) child who was legally adopted by another family, gets a share of Frank's estate should Frank die without a Will. Assuming that Frank died after the child was adopted by someone else, then no, the child would not get a share of Frank's estate. The child is considered the child of the adoptive family now and is entitled to a share of the adoptive parents' estates.

Is money I get from an estate taxable?

I'm frequently asked this question, and I'm not surprised. Every beneficiary wants to know what the impact of a gift will be.

A general rule for estates that are administered in Canada and paid to Canadian beneficiaries is that inherited money is not taxable. So if one of your relatives leaves you $100,000 in cash in their Will, you don't have to pay tax on the $100,000.

Another general rule is that when there is a gift that gives rise to tax, the tax is paid by the estate. For example, let's look at what would happen if the $100,000 that was left to you was not held in cash, but was held in an RRSP. If you are the spouse of the deceased (or in limited circumstances, a handicapped child of the deceased), the full $100,000 of the RRSP can roll over to you without you having to pay tax at the time it's rolled to you. (The tax payment is deferred until you pass away or take the money out).

But if you are not the spouse of the deceased, then the tax situation is completely different. Everyone who has an RRSP knows that when the money goes in, it is not taxed. When it comes out, it's taxed. On estates, the law says that the deceased's RRSP is considered cashed out at the time of death. That means the tax has to be paid. Debts of an estate, including taxes, are normally paid out of the residue of an estate. For a beneficiary inheriting an RRSP this should mean that he or she gets the full value of the RRSP and the tax is paid by the estate. This assumes, of course, that there is actually enough money in the residue to pay it.

A similar issue arises with capital gains tax on real estate. If you inherit the house that was the deceased's principal residence, then there is no capital gains tax to worry about because a principal residence is exempt from it. But you might have been left the cottage or a revenue property or other real estate. On those properties, capital gains tax will arise. Normally this tax is paid from the residue of the estate, assuming there is cash enough to pay it.

Keep in mind that in particular circumstances, the beneficiary could still be affected by tax arising from the gift. The wording of a Will can make a big difference. In some Wills, the deceased has stated that each person who inherits something under the Will will pay the tax on his or her own inheritance, instead of the estate paying it. That is perfectly legal.

Another important note about estate money is that the fees taken by an executor for his or her work on the estate are taxable. They must be included as earned income on the executor's personal income tax return.

Estate taxes are tricky. Executors should be careful and consult accountants or estate lawyers if things get complicated.

What does probate REALLY cost? (updated Aug 27, 2013)

With all this talk about probate and avoiding probate, it's important to have the facts. I'm often asked what probate costs. I know the people who ask me that would love a really short answer, such as "it costs $100", but realistically that short answer doesn't exist. What probate will cost depends on where in Canada you live, and what assets are in the estate.

When we talk about the cost of probate, strictly speaking the answer should be about what the court will charge you to process the probate application. To me, though that answer is essential, it's not the whole picture. The other half of the picture is the fee charged by the lawyer. In this post I'll look at both.

First of all, court fees (otherwise known as probate fees). If you apply for probate, there is no way to avoid paying a fee, even if you don't use a lawyer. Each province and territory is different and a chart of the court probate fees by province is shown at the end of this post. There is no fee or a very low fee for smaller estates. The areas of Canada that have a maximum fee are Alberta ($400) and Quebec ($65). In every other province and territory, the fee continues to increase as the size of the estate increases and there is no upper limit. This is one of the main reasons individuals like to do estate planning - they'd rather arrange things so that the money ends up with their families and not the "taxman".

Secondly, lawyer's fees. Again, they change from one place to another. It's not unusual for a lawyer to charge a percentage of the estate (up to 2% , but less for larger estates). However, it's more common that a lawyer will charge by the hour. This is because it's not always possible at the beginning of a matter to determine how long it's going to take to do the job. "Getting probate" is a complicated process if the deceased owned property that needs to be appraised, or had accounts in several banks and brokerages, or owned assets overseas.

Alberta	$25 for estates under $10,000 $100 for estates between $10,000 and $24,999 $200 for estates between $25,000 and $124,999 $300 for estates between $125,000 and $249,999 $400 for estates of $250,000 or more
British Columbia	$0 for estates under $10,000 $208 for estates between $10,001 and $25,000 $6 for every $1,000 (or part of $1,000) by which the value of the estate exceeds $25,000 but is not more than $50,000 Plus $14 for every $1,000 (or part of $1,000) by which the value of the estate exceeds $50,000
Manitoba	$50 for the first $10,000 $6 for every $1,000 by which the value of the estate exceeds  $10,000
New Brunswick	$5 for each $1,000
Newfoundland and Labrador	$85 for the first $10,000 $5 for every $1,000 by which the value of the estate exceeds $10,000 Plus $50 for the probate Order
Northwest Territories	$25 for estates under $10,000 $100 for estates between $10,000 and $25,000 $200 for estates between $25,000 and $125,000 $300 for estates between $125,000 and $250,000 $400 for estates worth $250,000 or more
Nova Scotia	$70 for estates under $10,000 $176 for estates between $10,000 and $25,000 $293 for estates between $25,000 and $50,000 $820 for estates between $50,000 and $100,000 Plus $13.85 for each $1,000 (or part of $1,000) by which the value of the estate exceeds $100,000
Nunavut	$25 for estates under $10,000 $100 for estates between $10,000 and $25,000 $200 for estates between $25,000 and $125,000 $300 for estates between $125,000 and $250,000 $400 for estates worth $250,000 or more
Ontario	$5 for each $1,000 for the first $50,000 Plus $15 for each $1,000 (or part of $1,000) by which the value of the estate exceeds $50,000
Prince Edward Island	$50 for estates up to 10,000 $400 for estates from $10,001 to $100,000 Plus $4 for each $1,000 (or part of $1,000) by which the value of the estate exceeds $100,000 Plus closing fee of 0.2%
Quebec	$0 for notarial wills $65 for non-notarial wills
Saskatchewan	$7 for every $1,000 (or part of $1,000) of estate value
Yukon	$0 for estates up to $25,000 $140 for estates that exceed $25,000

When can an administrator start acting for an estate?

An administrator of an estate is similar to an exector in many ways, but there is one very important difference. An executor has the legal authority to act on behalf of an estate as soon as the person who appointed him or her dies. This is because the executor's authority is set out in the deceased's Will. An administrator, on the other hand, has not been named by the deceased. This means that an administrator can't act on behalf of an estate until he or she is appointed by the court, which could take a few weeks.

If a person dies without any Will at all, someone must apply to the court for a Grant of Administration. If the person dies leaving a Will, but the Will does not appoint an executor (for example, the named executor has died and there is no alternate named) there is a slightly different procedure. Assuming that the Will is otherwise valid, the person would apply for a Grant of Administration With Will Annexed. This means that the Will is going to be followed in every way other than replacing the executor.

If you intend to apply to the court to become the administrator of an estate for someone who has recently passed away, you can:

• protect any of the assets that you can
• if there are cheques for the deceased person, set up an account in the name of the estate and put the cheques in
• make funeral arrangements
• take the bill for the funeral to the deceased's bank and ask them to pay the bill out of the deceased's bank account

Some of the things you should not do before you are appointed are:

• pay any bills (other than funeral as mentioned) using the deceased's money
• tell people that you are in charge of the estate
• place a Notice to Creditors and Claimants in the newspaper
• sign any papers on behalf of the estate
• make enquiries about life insurance policies, bank accounts, investments etc belonging to the deceased in which you state or imply that you have authority to gather the information or the assets

An administrator is entitled to be paid for his or her work just as an executor is.

If someone in your life has passed away without leaving a Will and you are the person who is going to apply to the court, you may feel some urgency to get on with the things that need to be done in the estate. Take the time to do things legally and correctly to protect the beneficiaries of the estate, and to protect yourself from future liability. The first thing to do is see a Wills and Estates lawyer to get the application to the court going. If you choose a lawyer who does not specialize in Wills and Estates, you can expect the process to take longer.

If you are appointed as an administrator but are completely overwhelmed by the responsibilities or the time pressures, keep in mind that you can walk into any Scotiabank branch and ask them to call the trust department to help you. You can hire Scotiatrust to be your agent. This means that you're still the administrator and can call the shots, but you will have someone to do all the legwork.

What is in your estate and what is not?

One of the issues that should be explored during the estate planning process is the question of which of your assets fall into your estate, and which do not. This is important because when you make a Will, the Will directs what will happen with the assets that are in the estate. Not everything your own is necessarily going to be part of the estate.

So what kind of asset would not fall into your estate? There are two general categories of assets that do not.

First, assets that are jointly held with another owner do not form part of your estate. Examples that are familiar to most people are jointly owned homes, and joint bank accounts. The fact that these assets are jointly owned means that when one of the owners dies, the other one still owns the asset by right of survivorship. Note that "jointly owned" is not the same thing as "half and half". When you own something jointly, you cannot give away "your half" in your Will because you don't actually have a half. The surviving joint owner owns the whole asset. Therefore, the jointly owned asset is not controlled by your Will.

Second, assets that name a beneficiary do not form part of your estate. Some familiar assets that are set up this way are RRSPs, RRIFs and life insurance. For example, if you buy a life insurance policy, you will be asked who will receive the money from the policy after you pass away. That person is the beneficiary, and the money will be paid by the insurance company right to that person without the money ever passing through your estate.

The second type of asset, those with named beneficiaries, can be paid to your estate if the beneficiary you name is your estate instead of a person. Some people name their estates as beneficiary of insurance policies or RRSPs to make sure there is cash in the estate for the payment of debts and expenses.

When you go through the estate planning process with your lawyer, make sure you tell the lawyer whether any of your assets are jointly held and tell him or her who is named as the beneficiary under insurance policies, pensions, ESOPs, LIRAs, RRSPs and RRIFs. This will help the lawyer make suggestions about how you should set up your Will.

Do you have to be an executor if you don't want to?

In this blog, I like to try to answer the questions that I've been asked by clients repeatedly over the years. This is one of those questions. I am often asked by individuals who have been appointed as an executor in someone's Will whether they must act as executor even though they really don't want to.

The short answer to the question is no, you can't be forced to be an executor. If a person passes away and has named you as his or her executor, you have the choice either to be the executor or to renounce (waive) your right to be the executor.

But, as with all general rules, there is an exception. If you have intermeddled in the estate, you will have no choice but to carry on as executor until the court discharges you. In other words, if you are going to renounce, you had better do it right at the very beginning, before you handle anything to do with the estate. Intermeddling is a legal term that means you have done something with the deceased's assets that leads people to believe that you intend to be the executor. For example, you might write a letter to a bank saying that you are the executor and asking them to freeze an account. This would lead the bank to believe that you plan to act as executor of the estate. Taking possession of any of the deceased's assets would also be considered to be intermeddling.

There have been plenty of cases through the courts to determine what is intermeddling and what is not. It's clear that if the only thing you do for the estate is pay the funeral expenses, you will not be considered to be intermeddling.

Keep in mind that if you are legally bound to be the executor but you refuse to do anything or you do it sloppily, and the estate suffers financial loss because of your actions, you could well be on the hook personally to repay those financial losses.

If you are named as an executor, you should consider whether you are really able and willing to carry out the job. You should think about personal liability for your mistakes, the complexity of the estate, the nature and value of the assets, the demands on your time, the expertise that might be needed, conflicts with family members or beneficiaries, the need to post a bond, and whether you will have any trouble getting fair compensation from the estate. Obviously you need to think about all of this before you take any action on behalf of the estate.

If you've been named executor of an estate and you really feel overwhelmed by it, remember that you can walk into any Scotiabank branch and ask them to put you in touch with the staff in the trust department who administer estates every day. You might be surprised at how many options are open to you at that point, and there is no cost to simply asking about our services. If you're in Alberta, feel free to call me personally to talk about it.