When and why to have more than one
In some Canadian jurisdictions, a person can have more than one will. The main reason for using multiple wills is to save probate tax.
Assume an individual, call her Betty, dies in Ontario and owns the following assets at her death: a home owned jointly as joint tenants with her spouse worth $1 million; an RRSP with her spouse named as beneficiary worth $400,000; a cottage property, solely in her name worth $500,000; private company shares, solely in her name worth $1 million; and an investment account solely in her name worth $500,000.
How will these assets pass on her death and what probate tax will have to be paid?
She left a will in which her spouse is the sole executor and beneficiary of her estate.
In this example, the home will pass outside her will to her spouse by right of survivorship because it was held as joint tenants. Similarly, the RRSP will pass to her spouse outside her will because the spouse was named as beneficiary.
The three assets solely in her name, namely, the cottage, the private company shares and the investment account form her estate. As executor, Betty’s spouse is responsible for collecting these assets under her will. With limited exceptions, Betty’s executor will likely have to validate her will (a process commonly referred to as “probate”) in order to deal with some of these assets.
In this example, both the financial institution and the land registrar will require probate of the will before transferring those assets to her executor. Under Ontario law, in this scenario, it may not be necessary to probate the will to transfer the private company shares to her spouse.
When probate is required in Ontario for any asset that passes under a will, the estate has to pay Estate Administration Tax, commonly referred to as probate tax. Probate tax is about 1.5 percent of the value of assets that pass under the will. In this example, Betty’s estate is $2,000,000 (the total value of the cottage, private company shares, and investments) and her estate would owe approximately $30,000 in probate tax.
A better strategy
How would the use of the dual will strategy save probate tax in this example? Betty could have prepared one will to deal with the assets that require probate – the cottage and the investment account – and another will to deal with the assets that do not require probate – the private company shares.
The dual-will strategy works as follows: allocate all the assets that will likely require probate into one will (the “Primary Will”) and allocate assets that will not require probate into a second will (the “Secondary Will.”) When Betty dies, the Primary Will would be submitted to probate and the Secondary Will would not be submitted. Based on a decision of the Ontario courts called the Granovsky Estate case, probate tax is paid only on the value of assets that pass under the Primary Will. Other provinces have apparently not accepted this practice.
If Betty allocated her private company shares to a Secondary Will, and that will did not need probate, probate tax could have been saved on the value of the private company shares. In this example, her shares are worth $1 million and by using the dual will strategy could have resulted in about $15,000 of probate tax savings.
Because Betty died with only one will, all of the assets governed by that will (the cottage, the investments and the private-company shares) are included in the probate tax calculation.
In Ontario, the dual-will strategy is most often used to save probate tax for individuals who own private company shares of significant value. The strategy can also be used to save probate tax on the value of other assets that pass under a will but for which probate may not be required to transfer title to the executor on death i.e. contents of a home, personal effects, certain loans and assets held in trust.
A note of caution, not all private company shares that a deceased person owns are exempt from probate. The strategy is most likely to work in situations where the shares are closely held by the deceased and other immediate family members or will pass to immediate family. In situations where the private company shares are held by the deceased and arms-length third parties, the strategy may not work as the third party shareholder may not wish to take the risk of dealing with the deceased person’s shares without probate of the will. There have also been instances where the corporation’s bank has insisted on probate of both wills as part of their risk management. Both wills may also require probate if the estate is involved in litigation.
When drafting dual wills it is important to be mindful of a variety of additional planning considerations such as who will be the executors under both wills, how debts and taxes will be allocated and ensuring fair treatment of beneficiaries under both wills. To avoid potential issues it is recommended that the executors and the beneficiaries are also the same under both wills.
Get expert advice
In the right circumstances in Ontario, having more than one will can be an effective part of an estate plan. In the worst-case scenario, all wills may have to be submitted for probate and the estate and its beneficiaries are in the same position they would have been had only one will been prepared.
For those individuals that are unable to take advantage of the use of dual-will strategy to save probate tax, there may be other ways to reduce probate tax on death, such as designating a beneficiary on plans and policies, in the right circumstances owning assets jointly, transferring assets into trusts, and gifting amounts prior to death.
Speak with your estate lawyer to learn about how to organize your affairs and co-ordinate all parts of your plan to ensure your wishes are carried out in a tax efficient manner.
Sabrina Gismondi is a trust and estate lawyer at Lawrences Lawyers in Brampton, Ont.