Probate Fees & Joint Ownership
When planning your estate, one factor to consider is the estate administration tax, commonly referred to as probate fees, that your estate may have to pay out.
Probating a will is the act of judicially certifying a will’s validity as well as confirming the executor’s authority. Although a will is a legally binding document and the executor derives his or her authority from the will, probate may still be necessary.
When a will is probated, an estate administration tax must be paid. This tax is calculated based on the fair market value of all the assets covered by the will submitted to probate, less any encumbrances on real property. The rate is $5 per $1,000 up to $50,000 and $15 per $1,000 on the balance of the estate. For example, an estate worth $257,000 would be required to pay $3,355 in estate administration tax.
In order to pay less in probate fees, many people have begun to look at ways of reducing the size of their estates. One way is to transfer valuable assets, such as a home, a cottage or a mutual fund portfolio, into joint ownership.
Joint tenants each own the whole of the property. On the death of one of the joint tenants, the property passes automatically to the survivor(s). The property does not become part of the estate and therefore is not subject to probate fees.
For many, the most valuable asset is their home. Therefore one mechanism that at first seems ideal, because of its simplicity, is to transfer title to your home into a joint tenancy with one or more of your children. However, before you rush down to the registry office, there are a few things to consider.
1. Possible tax consequences
When a principal residence is sold, the tax payer is exempted from paying taxes on any capital gain. However, you risk losing this valuable principal residence designation if you make your children joint tenants of your home. In fact, if the children do not live in the home, you will lose half of the principal residence exemption. In addition, if there are any outstanding mortgages on the property, land transfer tax will have to be paid.
This type of arrangement could also jeopardize your children’s access to the principal residence exemption or their eligibility to participate in government programs for first-time home buyers.
The transfer of other capital assets may trigger immediate capital gains taxation that would otherwise have been deferred.
2. Exposure to creditors
As joint tenants, your children become full legal owners of your home. As a result, the property is exposed to any outstanding or future debts of your children.
3. Family law considerations
In the event of your child’s marriage breaking down, the value of his or her interest in your home may be exposed to an equalization claim.
4. Family relations
Unless you make all your children joint owners in your home, conflicts could arise following your death since the provisions of a will cannot defeat the right of survivorship.
5. Loss of control
All joint tenants have an equal say in what should be done with the property and none can act independently. Therefore, the possibility of an eventual conflict between the various owners should be carefully considered.
6. Psychological element
Most people have worked hard for their home and may be reluctant to make their children equal owners while they are still active and healthy.
Before taking any measures to avoid probate taxes, speak to an experienced professional. A person with the expertise can spell out the advantages and disadvantages as well as help you work through the math.Share