A common question wills/estate lawyers are asked is: what can I do to minimize paying the government taxes? There is no one-size-fits-all answer, but for many individuals, preparing a Secondary Will is a great option.
A Secondary Will is exactly what it sounds like – it is a second Will, which works in tandem with a first Will (often called the “Primary Will”) to separate the assets that require probate, from those that do not.
One Will (the Primary Will) covers only the assets that require probate, whereas the other Will (the Secondary Will) is not submitted for probate and governs only the assets that can be administered without probate.
When used properly, this estate planning strategy means that Estate Administration Tax (“EAT”) is paid only on the assets governed by the Primary Will, and not on the assets governed by the Secondary Will. The tax savings can be quite sizable.
Probate and Estate Administration Tax
When you pass away, the assets that you own at the time of your death form what is referred to as your “Estate.” Your Estate is comprised of all assets owned or registered solely in your name, including for example; real estate, vehicles, bank accounts, and corporate shares. Most jointly held assets with a spouse (i.e., real estate, bank accounts, etc.) and assets with named beneficiaries (RRSP’s, Pensions, etc.), are not included in your Estate but instead pass directly to the surviving owner.
Generally, before Estate assets can be distributed to the beneficiaries named in your Will, your Estate Trustee (executor) needs to apply to the court for a Certificate of Appointment of Estate Trustee (more commonly known as “probate”). Whenever a Will is probated, your Estate must pay EAT. Currently in Ontario, EAT is equal to 1.5% of the entire value of your Estate (with the first $50,000.00 being exempt). Importantly, EAT is only paid when an Estate Trustee must apply to the court for probate. If you do not need probate, you do not pay EAT.
For certain assets, for example; real estate (located in Ontario), bank accounts, investments, and vehicles it is required to apply to court and receive a grant of probate. Without probate, the assets would be frozen in the name of the deceased owner. Whereas certain other assets, for example; shares in a private corporation like a family business, do not require probate.
However, the problem is that if one asset requires probate, then EAT must be paid on the value of ALL Estate assets, including the exempt assets (private shares). When used properly, a Secondary Will saves your Estate taxes by separating the exempt assets that can be administered without probate, so that the taxable value of your Estate is reduced. This is illustrated in the example below.
Tax Savings Example
Let’s assume you are the sole owner of the following assets when you die:
|Shares in a Private Corporation
Secondary Will: If you have a Secondary Will, EAT is levied on the assets that require probate (the home and the bank account) which are governed by your Primary Will; however, EAT is not levied on the exempt assets governed by your Secondary Will (the shares).
The total amount of EAT payable by your Estate, is $8,250.00 [calculated as ($500,000 + $100,000 – $50,000) x 1.5%].
Primary Will: If you only have a Primary Will, EAT is levied on all the assets that form your Estate.
The total amount of EAT payable by your Estate is $23,250.00 [calculated as ($1,000,000 + $500,000 + $100,000 – $50,000) x 1.5%].
In this example, preparing a Secondary Will saves the Estate $15,000.00 in taxes. This is a simplified scenario, but it shows how using a Secondary Will can reduce EAT, which ultimately means a larger inheritance for your beneficiaries.
In addition to the reduced EAT liability, there are other benefits that can be achieved by having a Secondary Will in place, for example:
Real Estate located outside of Canada: It may be beneficial to have multiple Wills when you own property outside of Canada. The laws in foreign jurisdictions often differ from Canadian law making it difficult for a Canadian Will to be compatible with the estate administration rules in that jurisdiction. Preparing a Secondary Will under the laws of the foreign jurisdiction, may streamline the estate administration process by allowing your Estate Trustee to distribute the Ontario assets governed by your Primary Will, before receiving approval from foreign government(s) to distribute your foreign property (which can often take a longer time to obtain).
Real Estate (First-Dealings-Exemption): Where an Ontario property has been converted to the Land Titles system from the Land Registry system and is being dealt with for the first time since that conversion, the requirement to apply for probate to sell the property may be waived. This exception is becoming increasingly less common, but if you have owned real property for decades and have not dealt with it since your purchase (i.e., added/removed another owner) this should be discussed with your estate lawyer. The use of a Secondary Will governing this type of real property means that no EAT will be levied against the value of the home.
Confidentiality: When a Will is probated, it becomes a matter of public record. Therefore, if you have privacy concerns with respect to your Estate and would prefer your assets, and the beneficiary(s) of those assets to be confidential, having a Secondary Will may help ensure confidentiality and privacy.
Other Valuable Assets: Secondary Wills can also be used to separate expensive assets; such as paintings, artwork, and jewelry that would not otherwise require probate. When these types of personal assets are covered under a Secondary Will you do not pay EAT on their value. For example, if you have $100,000.00 worth of jewelry that you want to leave to your child, it will need to be appraised and the value is included in the calculation of EAT. However, because no one (i.e., a bank or the government) needs to approve the transfer of your jewelry, you can exclude it from your Primary Will, by including it in your Secondary Will. If you take this step, the value of that jewelry will not be included in the EAT and you would save taxes.
In summary, while the greatest benefit to using multiple Wills (Primary and Secondary Will) is often the tax savings potential, there are several benefits that can be achieved. We recommend consulting with one of our estate lawyers to discuss how a Secondary Will can help you accomplish your estate planning objectives.