In Ontario, it is possible to have not one, but two (or more) wills. Having more than one will is a common estate planning strategy to try and save “probate tax”.
What is probate tax, how much is it, and when is probate required?
Probate tax, formally known as Estate Administration Tax, is a provincial tax that is payable to the Ontario government when an executor submits a will to Court to be validated; a process commonly referred to as “probate”. If probate of a will is required, the probate tax payable is about 1.5% of the total value of assets that pass under the will submitted to Court.
Probate is generally required to satisfy financial instructions, the land registrar, or other third parties that the executor has the authority to act on behalf of the estate.
Let’s take an example: John dies with an estate worth $5 million. He has one will. His estate is made up of a home that he owns in his sole name worth $2 million, private company shares in a family business worth $1 million, and solely-owned bank accounts/investments worth $2 million. The financial institutions where John’s bank accounts/investments are held require probate of his will in order for his executor to deal with the funds on deposit. Probate is also required for John’s executor to deal with his home. John’s executor submits John’s will for probate and John’s estate pays $74,250.00 in probate tax (about 1.5% of $5 million, with the first $50,000.00 being non-taxable).
In John’s case, probate tax was calculated on $5 million, being the total value of his estate. Even though probate was not required for John’s executor to deal with his private company shares, because the other assets in the estate needed probate, and because probate tax is payable on the total value of the estate, the value of the shares were included in the probate tax calculation. This is because probate tax is paid on the value of all of that assets that are governed by the will that is submitted to the Court for probate.
How could two wills have reduced the probate tax in John’s estate? With two wills, John could have allocated the assets that would have likely required probate, namely the home and bank accounts/investments, to one will, and the assets that would have not likely required probate, namely the private company shares, to a second will. John’s executor could have submitted only the first will to probate, and probate tax would have been paid only on the assets that were governed by that will. In other words, if the private company shares were allocated to a second will and the second will was not probated, John’s estate could have saved the probate tax on the value of the private company shares. In John’s case, with private company shares worth $1 million on death, his estate could have saved about $15,000.00 in probate tax.
The strategy of having more than one will is often used by individuals who own closely-held private company shares, but similar considerations apply to other classes of assets that may not require probate, such as some personal effects significant value, certain loans, assets held in trust, or real property that falls under certain exemptions. An estate planning lawyer can help to navigate what assets may fall into this category.
While the law in Ontario currently permits the use of multiple wills, and while it is very popular strategy, especially among business owners of closely-held private corporations and professionals (doctors, accountants, lawyers, who have professional corporations), there is no guarantee that this strategy will be effective on death. There could be reasons why both wills could end up in probate (for example, if the law changes to disallow such planning, or if the estate is involved in litigation, etc.). This strategy also tends to be best suited for business owners of closely-held private companies where the other shareholder are immediate family members. When the other shareholders are arms-length business partners, there is always a chance that the surviving shareholders may require probate of the second will so as not to take the risk of dealing with the deceased’s shareholder’s will without probate. An estate planning lawyer can canvass your particular situation to assess whether the multiple will strategy is right for you.
Despite its risks, multiple will planning remains a common strategy to save probate tax on death. While multiple-will plans can be more complex and relatively more expensive in terms of up-front legal fees, we have seen many instances where the strategy is very effective in reducing or even eliminating probate tax. Do you own shares in a closely-held private company or other assets that you think could benefit from having more than one will? If so, you should contact us to learn if the multiple will structure could benefit you.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.