Reducing your estate costs

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 estateEstate The total sum of money and property you leave behind when you die.+ read full definition. And there may be other estate costs, such as probateProbate Fees to settle your estate after your death. The probate process includes reviewing your will to ensure it’s valid. Also includes paying any debts and giving your money and property to the beneficiaries you have named in your will.+ read full definition fees and taxes on investments, that you may not have considered.

3 common estate costs

1. Probate fees

When you die, your executorExecutor Someone you name to carry out the wishes that you set out in your will after your death. May be named by the court if you don’t name one. In Ontario, an executor is called an estate trustee.+ read full definition 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 taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition) equal almost 1.5% of your estate’s value.

2. Tax on capital gains

You’re deemed to dispose of all capital propertyCapital property Property you own that could give you a capital gain if you sold it. Can include investments, a property other than your home and money from a trust account.+ read full definition 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-freeTax-free Money that you do not pay tax on.+ read full definition 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 insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition or open an RRSP or other registered plan accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition, you can name a beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition 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 assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition 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 trustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets until the beneficiary reaches legal age.+ read full definition 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 planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition 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 policyInsurance policy A written contract for insurance. It describes how long you are covered, what you are covered for, any part that you have to pay (the deductible) and what you will pay for the insurance (your premium).+ read full definition can help cover the cost of capital gains taxes.

Key point

Your debts must be paid first – before any money or property you leave behind is passed on to your loved ones.

Warning

Probate fees and capital gains taxes can be substantial. Factor them into your estate planning.