Estates (Jacobs) - 2018 PDF

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Very detailed and organized course notes, include notes from class and assigned readings. Important notes for exams are included....

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ESTATE PLANNING – 2018

16. ESTATE ADMINISTRATION CONSIDERATIONS 

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TAX

PLANNING

Generally: in order to administer the estate LR must give evidence of his proper authority to satisfy third parties (i.e. financial institutions) who have custody of estate’s assets registered in T’s name (investments in shares in public companies and real estate). o That evidence is called a “certificate of appointment of an estate trustee with/without a will” Probate Taxes/Probate Fees (estate administration taxes) = taxes that must be paid to the court when applying for certificate of appointment of estate trustee with/without a will in order to probate a will; levied based on the value of the assets passing through the deceased estate. It is very difficult to avoid probate fees because 3rd parties (banks) will demand a probated will. S. 2(8) EATA The taxes are payable by estate trustee in his/her/its representative capacity. Generation of these fees went to administrative cost within court system in Ontario. Even at lower rates, start collecting these fees on a whole bunch of estates and they add up and over centuries became a source of revenue for the government. How does the court feel when faced with constitutionality of these things and giving rise to loss of revenue to government if they were to strike this down on constitutionality element?

VALUATION 

S. 1 Estate Administration Tax Act Taxes are based upon the GROSS value of the assets of the estate [i.e. cannot deduct liabilities or debts except for mortgage debt on real estate situated in Ontario].  Before June 1992: o To obtain a certificate of appointment of estate trustee with/without a will it was necessary to pay probate fees to the court based on the value of the estate assets o Debts of any kind (other than a mortgage) were NOT deductible in calculating the value of the estate on which the fees were payable o RATE: $5 of fees on every $1K or less of assets (which meant essentially that you had to round up) – approximately one half of 1%  After June 1992, NDP brought in a new rate structure for probate fees – Two Tier System: o Ontario government tripled the rate on any amounts in excess of $50K at which these fees were payable The amount payable upon the issuance of an estate certificate  Less than $1,000  $0 [s. 2(2) EATA]  First $50K or less of assets  0.5% [$5 on each $1,000 or less - s. 2(6)(a) EATA]  On assets valued > $50K  1.5% [$15 on each $1,000 or less - s. 2(6)(b) EATA] * On $1million dollars, there will be roughly $15,000 (1.5%) of probate taxes (i.e. not much).  This caused uproar and led to constitutional challenge in Re Eurig Estate. Re Eurig Estate (October 22, 1998) (SCC)

(probate fees were not constitutionally valid, BUT Ontario now has authority to impose probate taxes) FACTS:

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E sought a declaration that the probate fees should not be payable, as it was invalidly charged by provincial government (i.e. this is not a fee, it’s a tax) - an indirect tax and therefore outside jurisdiction of provinces. COA said ad valorem fee structure (fee structure based upon value of the assets), which was imposed by regulations, was properly authorized under provincial legislation (Administration of Justice Act). Charge was a fee and not a tax- it is a fee based on the value of the asset, similar to land transfer tax, imposed by regulations.

ISSUE: Did the province of Ontario act within its jurisdiction in levying the probate fee structure? RATIO: Probate charge is a tax, not a fee  it is a direct tax on the estate because it is not borne personally by the executor, but rather in his/her representative capacity on behalf of the estate. This charge is both unconstitutional and ultra vires as it seeks to impose a tax “without clear and unambiguous authorization from the legislature to do so”. BUT, court was aware of potential political backlash and it suspended that declaration of invalidity for a period of 6 months to allow province to address the issue (this went beyond SCC’s authority as a judiciary). REASONS:   

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Pursuant to s. 92(2) Constitution Act, a province only has the jurisdiction to levy a direct tax, not an indirect tax. On the other hand, the province does have the jurisdiction to levy a fee, provided it is validly enacted under a provincial power other than a taxing power. Although the act of probating a will does not form the foundation of the executor’s authority but only evidence of it, such evidence is a practical and legal necessity in most cases. A fee usually is in an amount that bears some relationship or nexus to cost of relevant service; whereas, in this case, if you have a $10M estate or a $200K estate, the service that you’re getting is basically the same. You’re submitting a will, court certifying it (court doesn’t have to do any more work to certify a $10M will than a $200K will). Therefore, fee was significantly different due to ad valorem fee structure but here there is no link between service and cost. Thus, it’s a tax. Constitution Act says that all provincial bills for the imposition of any tax must originate in the legislature. The probate charge was a tax and the legislation that granted it (Administration of Justice Act, not a taxing statute) was not allowed to authorize it. A new piece of legislation called the Estate Administration Tax Act was enacted on December 18, 1998 (well within the 6 month period), which deals with the imposition of the estate taxes.

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They did it for political reasons to not cause a cessation to payment of these fees while government was getting its act in order. SCC realized loss of revenue that would result. Black thinks they should have let it stop after they said it’s unconstitutional instead of letting them have 6 months to address the issue. When the Conservative Party came into power in Ontario, Black would have thought that a smart political move would have been to revert back to former fee structure of just the $5 on every $1,000 of estate, but they didn’t; they retained the 2-tier structure. Conservatives thought NDP did the dirty work and we are just using it. BUT, Prior to 1992, nobody in the estate-planning world ever thought about estate planning to save probate fees; it was just a cost of administering an estate. Ever since 2-tier came out, there’s a new source of work for accountants and estate planning lawyers and that is how to reduce, eliminate, or minimize the estate planning taxes. We have no way of ever testing this but Black suspects that over time if they had just kept the old rate, amount of revenue that would have come into the province would have been more than what they have now lost because of people planning- they got too greedy. There’s been buzz about this in the community over the last 15 years.

POST-EURIG: The ON legislation passed the Estate Administration Tax Act (EATA). ON now has taxing legislation that deals with the imposition of probate taxes, which are now called estate administration taxes. ESTATE ADMINISTRATION TAX ACT, 1998 Definitions 1.(1) “Estate representative” includes, with respect to the estate of a deceased person, (a) an executor or administrator of the estate, (b) a person entitled to act in the capacity of executor or administrator of the estate, (c) a person appointed as guardian of a person who is a beneficiary of the estate of the deceased person or as guardian of the beneficiary’s property, (d) an estate trustee, (e) an estate trustee with a will, and (f) an estate trustee without a will.

WHAT IS EXCLUDED FROM CALCULATION OF PROBATE TAXES?  

NOT INCLUDED: Joint tenant, RRSPs, trusts, will substitutes From an estate planning perspective, if you can find a way to eliminate the assets that flow through your estate then you can minimize your probate taxes.

DO YOU NEED A GRANT OF CERTIFICATE OF APPOINTMENT TO ADMINISTER AN ESTATE?    

There is no legal rule that an executor must get a certificate, but there is an administrative demand for it. 3rd parties want to ensure that they are truly dealing with the executor (banks require proof in form of a certificate). This became elevated for practical purposes to a legal requirement in order to properly administer an estate and deal with estate assets. At CL, executor derives his authority from the will itself, but this is likely not enough for third parties; thus, because of this administrative requirement, it became law.

MINIMIZING PROBATE TAXES  

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OVERVIEW: As a result of the EATA, a whole area of estate planning has developed around avoiding probate taxes upon death. The main way to avoid probate taxes is to ensure that assets do not flow through the estate prior to being distributed to beneficiaries. Will substitutes serve as an effective means of avoiding estate administration taxes. WHY? Because EAT are only levied against assets that form part of deceased’s estate – assets that are gifted by means of a will substitute do NOT pass to the estate. Theoretically, if you structure entire estate in form of will substitute(s) then no taxes will be owing. NOTE: These techniques might not be effective anymore. The government has introduced new legislation (to be effective in 2014) that will tighten up the enforcement and compliance with EAT. Presently, it’s a loose system, there are few enforcement, assessment, or audit of the amount listed on the application.

LAWYER’S TIPS  When discussing with clients you have to weigh the savings of alternative estate planning and what adverse consequences there may be for doing the planning.

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Generally, the saving of income taxes is far more beneficial than the savings of estate administration taxes – therefore, if there happens to be a conflict between the two, one should concentrate on the former objective. Some of the planning can only be accomplished if you have a will. o If there are registered assets in the deceased’s name and he dies without a will, adverse consequences from an estate administration standpoint because no LR of estate since no will, thus application has to be made to court to have LR appointed, and EAT will be paid to get that certificate from the court. EXAMPLE 1 OF ADVERSE CONSEQUENCES: Elderly parent has 3 children and treats all equally and has a will that leaves estate equally among 3 children. All through her life, this woman held her assets in her name alone. A teller at local bank says she should put deposits in bank in joint tenancy with her daughter and so she changes all of her investments from her name into the names of herself and her one daughter as JTs and she knows that her daughter will treat it as part of her estate and it will ultimately be split among her 3 children. This will avoid probate taxes. BUT, o (1) Technically, when she put her daughter on as a joint owner, technically one could argue that she’s disposing of a 50% interest in those assets so that any future income or gain from that property should really be taxed ½ in her hands and half in her daughter’s hands. Does that happen? Likely not. Sometimes tax department picks up on it; sometimes they don’t. o (2) What if daughter has creditors? Those creditors could potentially seek to come after her interest in these joint accounts. Woman is becoming a partner with her daughter and subject to whatever creditors partner may have. EXAMPLE 2 OF ADVERSE CONSEQUENCES: T wants to leave her estate equally among children, but wants to avoid probate taxes. T changes title to the home as JT between her and 1 child (avoids probate taxes). The house cost $300,000; @ time of transfer = $500,000 (when she dies, asset will pass automatically to daughter outside of her estate and no EAT ($7,500) will have to be paid.); if she lives another 10 years, @ time of death house = $600,000. o (1) T would have paid $9,000 in EAT if it passed through her estate at time of death. However, at the time of transfer to JT the $200,000 capital gain was not taxed because it was a principle residence. At time of survivorship enacted (time of death), 50% of the value of the house is no longer exempt under personal residence (the child never lived there) – so the 50% of the $100,000 increase is not exempt for personal residence. $50,000 capital gain that is not personal residence of which half is taxed ($25,000). If child was in highest tax bracket, $12,500 income taxes would have to be paid. This is more than the $9,000 probate.  NOTE: Additional concern here is that you don’t know for sure that the child who had the house as JT will share it with the siblings as T intended – What was intention of mom when she put her daughter on as JT? Did she intend to make a gift to daughter at that point in time, or was daughter only being added as trustee so that when mom dies and assets pass to daughter, daughter is registered owner of investments now, but is holding these assets on a resulting trust in favour/for the benefit of mom’s estate? Difficulty is: no one ever documented what mom’s intentions were, so that’s why these cases arise.  To avoid this: sign a trust declaration that evidences mom’s intention. Probating a will is not a legal requirement – it is only an administrative requirement in certain circumstances 1. CHANGE LEGAL TITLE REGISTRATION WITHOUT CHANGING BENEFICIAL OWNERSHIP  EXAMPLE: T’s home is put in someone else’s name, but that person signs a trust declaration to say that the property is held in trust for T.

2. REGISTER OWNERSHIP OF ASSETS AS JOINT TENANCY  Transfer asset into a JT agreement so as to ensure that it is passed immediately to the JT upon death and does not flow through the estate.  Potential adverse consequences: unintended Income Tax consequences; loss of control over the assets & loss of principal residence exemption for a house.  Example: Widow has one son and she gives him part of her home as JTs (so there is a right of survivorship). Under ITA, the principal residence is free from tax on capital gains. BUT, from the point at which her son is put on legal title AND is not occupying the house, his 50% ownership if appreciated will be taxed as a capital gain. o so if son has a creditor/spousal support, he now has an asset o if it remained solely in mother’s name, the appreciation would be exempt from CGs which are more significant than probate taxes o NOTE: if transferee is a spouse, it can be done as a roll over o Example: 500K home, 600K value at death (100K gain). Mom transferred 75% to kids, who sell it after she dies. Of that 100K gain, 25% is attributed to her (her principal residence, so no gain has to be recognized). But because it is not the children’s principal residence, 75% of the 100K, or 75K, will be taxed as income. 3. DESIGNATE BENEFICIARIES ON REGISTERED RETIREMENT FUNDS, PENSION PLANS, INSURANCE POLICIES  i.e. RRSP, Pension Plan, Insurance Policy – all of these assets can have a “named” beneficiary  Avoid Income Taxes and Estate Administration Taxes because the assets go directly to the beneficiary without passing through the estate.  Life Insurance Trust: There is some debate re: whether you can establish a life insurance trust: you designate somebody to receive life insurance proceeds, as a trustee – then you detail the terms of the trust.  BUT, there are potential conflicts between beneficiaries: income taxes on the funds come out of the estate.  Example: Father has three children (and will divides estate equally between them). The RRSP has designated only one child as beneficiary. The income tax on the RRSP comes out of the estate, so 2/3 of the tax is being paid by the other children, even though only one gets to claim the money. 4. LAND REGISTRY SYSTEM  Land registered under Registry Act system does not require probated will in order to transfer title. However, very little land in ON is registered under this system since most land is registered under Land Titles system. 5. INTER VIVOS GIFT  If assets are transferred during one’s lifetime, it does not form part of the estate at death.  BUT loss of control (and other issues). 6. INTER VIVOS TRUST  Transfer assets to a trust during one’s lifetime. 7. LIE WITH RESPECT TO VALUE OF ESTATE ASSETS  No mechanism to enforce proper disclosure of value of assets passing through estate, lying becomes an option.

8. TRANSFER ASSETS TO A PRIVATE CORPORATION  If T owns shares in a private corporation, he could transfer all assets on tax deferral basis into the company and no EAT required to pay on the value of these assets upon death because they can be transferred w/o a probated will [subject to the internal resolutions within the private company].  The company can hold assets in trust for the beneficiary and there would be no probate taxes  Exception – principal residence: a person would not want to do this with his/her principal residence because would lose the principal residence exemption. 9. CHANGE THE SITUS OF AN ASSET TO A JURISDICATION OUTSIDE OF ONTARIO  Change the situs of an asset to a jurisdiction outside of ON that does not have probate taxes (or has lower rate).  Example: By transferring the asset into a corporation that is incorporated in another province in which either no probate taxes exist or the rate is lower than in Ontario. 10. AVOID PROBATE  Assess the possibility of administering the estate without a probate will; ideal only with a valid will, avoids EAT.  BUT, there is no evidence that legal representative is valid legal representative (so must assess estate assets).  Remember if someone other than the spouse is inheriting capital assets the estate will have to pay capital gains. 11. USE A BARE TRUSTEE CORPORATION TO HOLD LEGAL TITLE TO AN ASSET BUT NOT BENEFICIAL OWNERSHIP  T can transfer to T. CO. all of his assets (including house) and take shares in exchange. T. CO. would have legal title to the assets (nothing more than registration), BUT there is no change in beneficial ownership (whom value of asset belongs to) (evidenced by a declaration trust). When transfer occurs there are no tax consequences.  If company beneficially owned assets (which it doesn’t) then they’d have to appear on financial statements.  This totally avoids the probate taxes, and X is still beneficial owner of the assets.  Downside: there are costs involved in keeping the corporation going, also complicated.  Note however, that 3rd parties might not know about the beneficial ownership – on the registry they would only see T. CO.’s ownership. The assets will not be listed on T. CO. balance sheet. The shares do not have value in themselves because T. CO. does not have beneficial ownership of the assets (simply holding them in trust – T. CO. is a bare trustee – no value).  When T dies, financial institutions require evidence of the signing officers [who, once the T dies, will be the executors? – the beneficial ownership passes to the executors who elect themselves as directors and officers] of the company in order to permit them to transfer the assets; no need to probate for the assets to be transferred.  Income Tax Consequence? NO! Even principal residence exemption can be used  when transferring legal title there is no deemed disposition (only occurs with change of B ownership) . However, when T dies there would be a deemed disposition of assets at FMV.  Other Consequences: Bare trustee is optimal way to avoid probate taxes, however there are costs involved in setting up/maintaining (file tax returns). If T has assets >$1M then this is something to strongly consider.  NOTE: All of this assumes that the will is valid and there is no challenge case. 12. USING ALTER EGO AND JOINT PARTNER TRUSTS  These are creations of the ITA – designed to avoid Estate Administration Tax, still pay Capital Gains tax. These assets do not form part of the estate, because they are in the name of a trust. You do not suffer adverse tax consequences when you transfer assets to the trust.

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Normally, when you change beneficial ownership that is a disposition for income tax pur...