Navigating the options to bypass probate

When Canadians begin to take estate planning seriously, one of the first things they learn is the benefit of bypassing probate. This is frequently a recurring theme, and for good reason: assets that do not pass through the estate and probate process can reduce administrative delays, limit potential disputes, preserve privacy and in many provinces, minimize probate fees, which can be substantial in some provinces.

For most Canadians, beneficiary designations and joint ownership are the bread-and-butter options. Joint tenancy with rights of survivorship is applicable in common law provinces, but not available in Quebec. In certain cases, some may even consider the use of trusts. Although they are all roads leading to the same destination, without a clear understanding of how each differ, well-intentioned planning can produce unexpected outcomes.

Registered accounts such as RRSPs, RRIFs and TFSAs generally provide for direct beneficiary designations. Direct beneficiary designations are applicable in common law provinces, but not available in Quebec. For insurance contracts, including segregated funds, designating a beneficiary at the contract level for both registered and non-registered accounts is possible for all provinces.

When properly designated, upon death of the account holder, proceeds can be paid to the intended beneficiaries outside of the estate and bypass probate.

For non‑registered assets, direct beneficiary designations aren’t generally available. Where this is the case, what options are available to bypass probate for these assets?

Here’s a typical case: John is a successful investor living in a common-law Canadian province. He is widowed and has two adult children, Brandon and Katie. After a recent health scare, he is starting to think about his estate planning. John has been generous to his children, particularly to Brandon. Recognizing this, he would like his non-registered portfolio to go to Katie when he passes away. He would like the transfer to occur outside of his estate so that it’s smooth and efficient.

Joint ownership

Joint-ownership arrangements (e.g., adding family members to form a joint account) are commonly used to bypass probate. They’re not without flaws, however. Legal and/or beneficial ownership of the underlying asset may be transferred to form a joint-ownership arrangement. But a taxable event may be triggered if all or part of the beneficial ownership is relinquished.

In John’s case, not only will he relinquish some control and ownership to Katie, but he could also be exposed to potential claims from her creditors. The creditors can be from a commercial or marital context (e.g., a disgruntled spouse). Too often, these are not thoroughly considered when entering into a joint-ownership arrangement.

Additionally, without evidence of John’s intentions, there may be conflict and confusion among his children after his death. As a joint owner, Katie may be seen to hold the asset in-trust on behalf of John’s estate under the presumption of resulting trust doctrine.

If so, the asset may be brought back into John’s estate and divided according to his will, or provincial intestacy rules if he lacked a will. That would negate the original intention to bypass probate.

Beneficiary designations

While not as obvious, a second option for John involves beneficiary designations. Direct beneficiary designations are not available through ordinary bank or trading accounts for non-registered assets, but insurance contracts — including life insurance policies, annuities and segregated fund policies — can be used to access beneficiary designations in a non-registered context.

John could invest in a non-registered segregated fund policy, which allows him to designate a beneficiary for estate planning purposes and maintain his market position through the fund’s investment component.

While both beneficiary designations and joint ownership can bypass probate when properly implemented, sole ownership and control can be maintained with beneficiary designations.

John can designate Katie as a beneficiary via the non-registered segregated fund policy to bypass probate without giving up ownership to Katie. He can also change the designation through the insurance carrier directly or through his advisor.

Had he made Katie a joint owner, revoking it afterwards without her legal consent is less likely. Where retaining exclusive control and bypassing probate are both important, the availability and strategic use of beneficiary designations in a non-registered context should not be overlooked.

In some provinces, the same presumption of resulting trust doctrine noted above may be applied to beneficiary designations.

In Ontario, there were cases recently that affirmed and rejected the application of this doctrine for beneficiary designations. Considering the uncertainty, complementing beneficiary designations with formalized documentation of the individual’s intentions may be prudent.

Inter-vivos trusts

An alter ego trust (AET) could be used if John is 65 or older. If capital property is transferred to an AET, it can be done on a tax-deferred basis and the asset will not form a part of John’s estate when he dies. Capital property includes assets such as stocks, bonds, mutual fund or segregated fund holdings and real estate. Consideration and planning for transfer taxes involving real estate is required in some provinces.

This could allow probate to be bypassed. During John’s lifetime, he could maintain control over the underlying asset by being the trustee to this trust and set who its beneficiaries would be when he dies.

While this is a powerful alternative and frequently suggested for individuals 65 and over, the costs associated with initial set-up, ongoing maintenance and compliance can be significant. Changing beneficiaries can be onerous, too. Terms of the trust document may need amendments and a lawyer may be required.

Other strategies

There are other strategies available. John could minimize his estate by gifting assets to Katie during his lifetime. However, if retaining control and use of the asset during John’s lifetime is important, the three options mentioned above are usually the primary choices.

Joint ownership is simplest, but it can compromise control and introduce unintended consequences. Trusts are the most sophisticated solution. And beneficiary designations sit somewhere in the middle, offering a mix of flexibility and control.