We find that a parent will add a son or daughter as a joint owner of the parent’s bank account to avoid probate fees or to ensure the son or daughter has ready access to funds if the parent falls ill or dies. Although the Supreme Court of Canada has ruled that bank accounts held jointly between a parent and child are considered part of the parent’s estate (assuming the child did not contribute funds to the account), other children who were not joint owners may have to take their sibling to court to recover a share of the bank account if the joint-owner child does not agree.
Naming beneficiaries on insurance policies, registered retirement savings plans (RRSPs) and registered retirement income plans (RRIFs) and so on can be a great way to avoid probate provided all assets and the tax implications are carefully considered. Some parents name beneficiaries on an asset-by-asset basis. For example, a parent has a substantial RRSP which holds investments totalling $500,000. The parent’s other assets total approximately $500,000. The parent names child A as beneficiary of the RRSPs and leaves everything else to child B by way of the parent’s Will. The RRSP is not subject to probate fees although the rest of the estate is.
There are many problems with asset-by-asset distributions but the major concern in this example is that Child A receives the entire RRSP value while the estate (which has been left to Child B by the Will) is responsible for the taxes on the RRSP. In the year of death, the RRSP is 100% taxable income — almost half the value of the RRSP could be payable as income tax. However, as the RRSP is fully paid to Child A (financial institutions do not hold back tax when paying out on death), Child B takes the income tax hit as Child B’s inheritance is the estate which must pay the tax thus reducing what is left for Child B.
Continued in Part Five
