Though the rate of Ontario Estate Administration Tax (“EAT”) has not changed, the Government of Ontario recently amended this tax regime and the changes could mean a higher tax bill for Ontario estates.
Challenge # 1: Inclusion of some forms of jointly-held property in value of estate
When a joint tenant dies, all property (real estate, bank or investment accounts and personal effects) held in joint tenancy passes to the surviving joint tenant by right of survivorship. Prior to January 1, 2015, the value of the jointly-held property that passed by right of survivorship was excluded from the valuation of the deceased’s estate for EAT purposes – this exclusion is now no longer absolute. An executor (known in Ontario commonly as an estate trustee) must now carefully examine the circumstances behind the formation of the joint tenancy. If the estate trustee believes that the joint tenancy has “strings attached” in that the surviving joint tenant mustdistribute the jointly-held property amongst the beneficiaries named in the deceased’s will, the Estate Trustee must include the value of the jointly-held property as part of the taxable value of the estate.
The Solution: Multiple wills
A solution to the inclusion of jointly-held property in the value of the estate for EAT purposes is the use of multiple wills. The testator would select assets, such as real estate or investment accounts held in only that testator’s name, to pass under the testator’s primary will. This primary will would be submitted to court as part of the Application for a Certificate of Appointment of Estate Trustee with a Will (formerly known as “probate”) and the EAT would be paid based on the value of the assets covered by this primary will. The testator would also sign a secondary will in which the testator would refer to assets, including assets held jointly that were in the nature of a trust (the jointly held assets with strings attached) and other assets such as personal effects and shares of private corporations. The assets passing under this secondary will which is not submitted to court for Certificate of Appointment purposes, would not be subject to the EAT.
Challenge # 2: Inclusion of insurance proceeds in value of estate
Increases to the amount of the EAT payable by an estate could also arise from the inclusion of life insurance proceeds that are governed by insurance trusts. One of the major goals of an insurance trust is to control the age at which life insurance proceeds are distributed; this is of particular value if the beneficiaries of the insurance policies are minors or young adults. Prior to the changes to the Estate Administration Tax Act, insurance trusts were commonly included in wills as a matter of convenience by incorporating the terms of the trust in the will designed for the non-insurance assets to the insurance assets as well. Though the insurance was controlled by the terms of the will, the insurance proceeds were not deemed to form part of the estate value for EAT purposes.
The Solution: Insurance Trust Declarations
The recommended practice is now to create an insurance trust in a separate document called an Insurance Trust Declaration so that there is no mention of insurance in the testator’s will. Through this document the creator of the insurance trust, known as the settlor, would grant a trustee the power to control the distribution of the insurance proceeds. It is open for the settlor to choose terms, such as the choice of trustee, the designation of beneficiaries and the ages of distribution, that are the same as or different from the terms of the settlor’s will.
Though the changes to the Ontario Estate Administration Tax Act may appear subtle, their effect could significantly increase the EAT burden on Ontario estates. The risk to estate trustees has also been amplified by the changes as the Ministry of Finance has the power to audit an estate until a period of 4 years has elapsed after the date the EAT became payable.
Individuals should carefully review their estate plans and consider the options available to structure their estates to both minimize the EAT while at the same time protecting their estate trustees.