Should we take dad’s money now to avoid probate?

Q: My mom just passed away. Everything went to my dad. My sister and I are trying to decide if we should move the bulk of my dad’s money in accounts in our names to avoid probate. But we don’t want to be ‘joint’ as she owns farmland and we’ve seen cases where one or the other gets into financial trouble or sued, etc., then we’d essentially be putting her assets at risk and dad’s too.

Is there a better way?

—N

A: I come across questions like yours frequently, N. So, I thought it would be a good one for me to answer this week.

First off, it bears pointing out that your mother’s will left everything to your father. She didn’t leave any money to you and your sister. Presumably, that’s because your parents’ intention was to have their estate be theirs until they were gone, at which point, it would presumably become yours.

Even if you are a power of attorney for your father, whether he has capacity or not to make his own financial decisions, you don’t have the authority to start distributing his assets based on his will until he has died.

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If your father wanted to gift assets to you and your sister now, that would be one thing. Gifting assets to family members during one’s life can be a valid tax and estate strategy under the right circumstances. But I noticed you refer to you and your sister trying to decide on whether to move your father’s money – not your father trying to decide, N.

READ: The wrong way to save on probate fees

In much the same way you’re worried about holding the money jointly with your sister in case she gets sued, your father may worry about giving the money to you and your sister. Besides getting sued, what if one of you gets divorced? Depending on the province you’re in and what you do with the money once you take it from your father, you might put it up for grabs in the division of net family property upon a marriage breakdown.

What if your father lives for a long time? What if he requires extensive and expensive long-term care? Full-time care can cost $10,000 per month or more.

If your father owns investments that have appreciated in value, you will also trigger capital gains tax by selling them or by transferring them to you and your sister. This could even impact his entitlement to certain government benefits like his Old Age Security (OAS) pension.

I should point out for you, N, as well as other readers, that probate may not be as big a deal as it is made out to be. Probate is a legal process to have a will approved and get permission for the executors to distribute the estate. Probate fees vary by province.

MORE: Can I avoid probate?

Nova Scotia has the highest probate fees in the country for large estates, with $1,002.65 payable on the first $100,000 and 1.695% on the excess. Ontario charges $250 on the first $50,000 and 1.5% on the excess. Alberta, Quebec and the territories all have flat fees under $1,000. The remainder all have graduated rates depending on the size of the estate.

On that basis, you might be trying to save roughly 1%-1.5% at most, N., depending on your father’s province of residence. By advancing the money now to you and your sister, besides the fact you don’t have the authority to do so, could you be risking 50% of that in the event of a divorce to save 1-1.5%?

If your father has a sizeable estate, he could consider an alter ego trust. It’s a trust your father would set up with a lawyer to move some or all of his assets into during his lifetime. Your father would be the only person entitled to receive income or capital from the trust until he died. Assets could be transferred into the trust on a tax-deferred basis.

On his death, the assets would avoid probate and be distributed efficiently to you and your sister. The trust could act much like a power of attorney, with you and your sister acting as trustees for the trust, now or in the future.

An alter ego trust may cost $5,000 or more to establish and may or may not be a good fit for your father. But it may be a better option than distributing your father’s estate during his life, N.

In 2017, Royal Bank introduced a joint non-registered account option called a “joint account with gift of beneficial right of survivorship” or “JGBRS” for short. They touted it as a way to gift assets to one or more people; control your investments during your life; and avoid probate. I can’t comment specifically on this type of account, but it helps reinforce that there are alternatives.

I think before engaging in estate planning for a parent, one would be wise to seek input from an estate planning professional to avoid unnecessary consequences. After all, it’s really not your money to do as you wish with it until it actually belongs to you.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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