Is Avoiding Probate Fees Worth It? A Balanced Look at Your Options

Is Avoiding Probate Fees Worth It? A Balanced Look at Your Options

The Probate Question Many Ontario Residents Face

When planning your estate, you’ll likely encounter advice about avoiding probate fees. In Ontario, these fees (officially called Estate Administration Tax) amount to approximately 1.5% of your estate’s value over $50,000. While that might sound significant, the real question is: are the strategies to avoid probate worth the cost, complexity, and potential risks?

As one estate planning expert puts it: “One of the most common mistakes people make in estate planning is to make major changes just to avoid probate.”
 

Understanding the Real Cost

Let’s put probate fees in perspective. In Ontario:

• First $50,000: No fee
• Over $50,000: 1.5%

For a $1 million estate, you’d pay approximately $14,250 in probate fees. Compare this to your marginal income tax rate, which could be over 50% on certain assets. The key insight: probate fees are generally much smaller than potential income tax consequences.

Common Probate Avoidance Strategies: Pros and Cons

1. Naming Beneficiaries on Registered Accounts

The Strategy: Designate beneficiaries directly on your RRSP, RRIF, and TFSA accounts.

Pros:

• Simple and cost-effective to implement
• Assets transfer quickly to beneficiaries without probate
• No ongoing costs or complexity
• TFSA passes tax-free to beneficiaries

Cons:

• RRIF/RRSP values are fully taxable as income in the year of death
• High withholding tax (up to 30%) may not cover the full tax liability
• These assets bypass your will, potentially creating inequality among beneficiaries
• Once transferred, they can’t be used to pay remaining estate taxes.

Bottom Line: This is generally a good strategy for registered accounts, but coordinate with your overall estate plan to ensure sufficient assets remain to pay final taxes.

2. Adding Children’s Names to Property or Investments

The Strategy: Joint ownership with right of survivorship on your home or investment accounts.

Pros:

• Assets pass directly to joint owner, avoiding probate
• Seemingly simple solution

Cons:

• Loss of control: Your child becomes a legal owner immediately
• Exposure to their creditors: If your child faces a lawsuit or bankruptcy, your assets are at risk
• Divorce complications: Your assets could become part of your child’s marital property
• Tax implications for your child: They may face capital gains tax on any appreciation since being added
• Attribution rules: Investment income may be attributed back to you for tax purposes
• Principal residence exemption issues: Your child may lose their own principal residence exemption
• Bare trust reporting: Under new CRA rules, you may need to file annual T3 trust returns

Bottom Line: For assets worth over $1 million (homes) or $250,000-$500,000 (investments), the risks typically outweigh the probate savings. The potential tax costs and creditor risks are usually more expensive than probate fees.

3. Creating an Inter Vivos (Living) Trust

The Strategy: Transfer assets to a trust during your lifetime.

Pros:

• Can avoid probate on trust assets
• Provides control over asset distribution
• May offer privacy (trust documents aren’t public)
• Can be useful for complex family situations

Cons:

• High setup costs: $5,000-$10,000 in legal fees
• Ongoing costs: Annual trust tax returns typically cost $1,000+ to prepare
• Loss of principal residence exemption: Transferring your home triggers capital gains tax from the transfer date until death
• Deemed disposition: You’re considered to have sold assets at fair market value when transferring to trust
• Only cost-effective for larger estates: Generally makes sense only for non-registered investments over $1 million.

Example: For $700,000 in non-registered investments, probate would cost about $10,000. A trust costs $5,000-$10,000 to set up plus $1,000+ annually. You’d need to live many years for the trust to be cost-effective, and that’s not counting the potential tax consequences.

Bottom Line: Trusts can be useful planning tools for specific situations (such as beneficiaries with special needs, blended families, or very large estates), but they’re rarely justified solely for probate avoidance on modest estates.

4. Selling Your Home to Create Liquid Assets

The Strategy: Sell your home before death, invest the proceeds, and rent or move to assisted living.

Pros:

• Principal residence exemption applies, so no capital gains tax
• Creates more liquid assets for management
• May provide lifestyle benefits if downsizing is desired

Cons:

• No real probate savings: The home’s value just moves to your investment account, which is still subject to probate
• Loss of principal residence exemption benefit: Once sold, future appreciation is taxable
• Increased probate costs: A larger investment portfolio may actually increase probate fees
• Lifestyle impact: Should be a personal decision, not a tax-driven one

Bottom Line: This should be a lifestyle decision based on your housing needs, not a probate avoidance strategy. If you do sell, and your non-registered investments exceed $1-2 million, then a trust structure might make sense.

The Smart Approach to Probate Planning

Rather than making major life changes to avoid probate, consider this balanced approach:

1. Use beneficiary designations on registered accounts (RRSP, RRIF, TFSA) and life insurance policies – but watch for Successor Holder on TFSA’s.
2. Keep your non-registered investments in your estate to pay final tax bills and probate fees
3. Maintain ownership of your home until death to preserve the principal residence exemption
4. Ensure your will is current and clearly states your wishes
5. Work with professionals to calculate your estate’s projected tax liability and ensure sufficient liquidity
6. Consider a trust only if: 
   • Your non-registered investments exceed $1-2 million
   • You have complex family dynamics requiring specialized planning
   • You have beneficiaries with special needs
   • Privacy is a significant concern

The Hidden Risk: Not Enough Estate Liquidity

Here’s a scenario many executors face: registered accounts pass directly to beneficiaries (avoiding probate), but this leaves the estate without enough cash to pay the final tax bill. Remember, RRIF withdrawals trigger up to 54% income tax in Ontario on amounts over $260,000, but only 30% is withheld initially. The estate needs other assets to cover this shortfall.

Key takeaway: Probate fees on non-registered assets may actually be helpful because these assets remain available to pay estate taxes and debts.

Final Thoughts

Probate fees at 1.5% are a known cost that provides important benefits: validating your will, protecting your executor, and ensuring an orderly distribution of assets. While it’s worth exploring strategies to minimize these fees, dramatic restructuring of your estate—with its potential tax consequences, loss of control, and exposure to creditors—is rarely worthwhile solely to avoid probate.

Focus instead on:

• Comprehensive estate planning that considers all taxes, not just probate
• Ensuring sufficient estate liquidity for final obligations
• Making decisions based on your life circumstances, not just tax minimization
• Regular reviews of your plan as laws and circumstances change

**This article provides general information only and should not be considered legal or financial advice. Ontario residents should consult a qualified estate planning professional who is familiar with their specific circumstances.

Questions for Your Estate Planning Professionals – Your Accountant and Lawyer:

1. Based on my estate’s size and composition, what are the projected probate fees?
2. What are the total projected taxes and liabilities my estate will face?
3. Will my estate have sufficient liquidity to pay all obligations?
4. Are beneficiary designations on my registered accounts appropriate, given my overall plan?
5. Do any special circumstances in my situation warrant consideration of a trust structure?

Have questions about your will or estate plan? Contact Smartwills today to schedule a review.