Reducing your estate costs
Advance planning can help cover or minimize estate costs you may not have considered.
When you die, your debts must be paid first – before any money or property you leave behind is passed on to your loved ones. There may also be funeral costs, legal fees and other administrative expenses in settling your estate. And there may be other estate costs, such as probate fees and taxes on investments, that you may not have considered.
3 common estate costs
1. Probate fees
When you die, your executor often needs proof (requested by financial institutions, government agencies and others) that they are the person authorized to represent your estate. Probate is the process that provides court certification of this fact. There can be a cost to this – and probate fees to settle your estate can be high depending on the province you live in. In Ontario, the fees (officially called an estate administration tax) equal almost 1.5% of your estate’s value.
2. Tax on capital gains
You’re deemed to dispose of all capital property at death. Your estate must cover the tax on any capital gains.
3. Tax on tax-sheltered savings plans
Registered plans such as RRSPs and RRIFs can be transferred tax-free to your spouse’s plan. If you don’t have a spouse, these savings are fully taxable at your death.
5 ways to manage estate costs
1. Leave a valid will
If you die without a valid will, your estate gets settled according to the laws of your province, rather than according to your personal wishes. This can be a more complicated process, with higher legal fees and the potential for costly disputes.
2. Name beneficiaries for insurance and registered plans
When you buy life insurance or open an RRSP or other registered plan account, you can name a beneficiary to receive the money when you die. This means the money bypasses the estate process and is paid directly to that person. Because it does not form part of your estate, the money is not subject to probate fees and there is no delay in your beneficiaries receiving the money.
3. Jointly own property
Holding assets – such as a home or cottage – with another person is another strategy for reducing probate fees. Joint assets pass automatically to the surviving joint owner – and are generally not considered part of your estate and subject to probate fees.
However, there can be complications to joint ownership, especially if you co-own an asset with someone other than your spouse. For example:
- If you transfer half-ownership of an asset to an adult child – and they have a spouse who they later separate from – the spouse could have a claim on your child’s half of the asset.
- If your child has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by creditors.
- If the asset has increased in value, you may have to pay tax on any capital gains when you transfer your half ownership. This is because a transfer is considered a sale for tax purposes.
- You can no longer deal freely with the asset and must make joint decisions in managing or selling it.
Professional advice is essential
Joint ownership arrangements can be complicated. Get expert legal and tax advice before entering into one of these arrangements.
4. Preplan and prepay your funeral
Preplanning and prepaying your funeral doesn’t necessarily save you money, but it does remove a key expense that your family or estate must cover upon your death. When you prepay, the money goes into a trust account or insurance fund until your funeral.
You gain certainty over costs because you choose the type of funeral you want in advance. And your family is saved the difficult job of making decisions during a time of grief.
5. Buy permanent life insurance
Life insurance proceeds can be paid to your estate to cover estate costs or left directly to a beneficiary to provide additional amounts to a particular person. The proceeds are always paid tax-free.
Consider a permanent insurance policy for estate planning purposes. Permanent insurance covers you for life, no matter how long you might live. Term insurance does not.
Probate fees and life insurance
When you name a beneficiary for your insurance proceeds, the money is paid directly to your beneficiary. It does not form part of your estate and is not subject to probate fees.
You can also use insurance to cover estate costs. To do this, name your estate as the beneficiary. Your estate will pay probate fees on the insurance proceeds, but it gives your estate the cash to pay debts, taxes or other obligations. This can avoid the sale of estate assets – such as a home or cottage – that beneficiaries may want to keep in the family.
Life insurance can help cover estate costs
Taking out a life insurance policy can help cover the cost of capital gains taxes. Read Jane’s story
to find out how.