Make Things Easier for Your Family and Executor(s) – Designate Personal Effects in Your Will

In March of 2011, I wrote a blog post titled Personal Use Property – Taxable even if the Picasso Walks out the Door. The blog discussed the taxation of personal use property and noted how many parents often neglect to deal with their art, jewelry, collectibles and sentimental personal effects in their wills. These omissions may be either inadvertent, or on purpose, to avoid paying income tax and/or probate tax on the personal use property. The ramifications of this neglect are potentially twofold:

1. Parents, who take a leap of faith believing that their children will sort out the ownership of these assets in a detached and non-emotional manner, may be creating unnecessary dissension amongst their children.
2. Parents put their executor(s), who are often one or more of their children, in a precarious position, with respect to their liability for probate and income tax of the estate.

Ensuring an Orderly Distribution of Personal Property

Lynne Butler, an Estate Lawyer and Senior Will Planner for Scotia Private Client Group, and the writer behind the excellent blog Estate Law Canada, had this to say about personal effects: “My experience over the years has been that more estate fights happen over personal items of the deceased than happen over money. Sure we all like money but it's the personal items that have the sentimental value".

So how can parents mitigate the potential for a family fight? In three words: inventory and document. Parents need to undertake a detailed review of all personal items from art and antiques to jewelry to great grandma's tea set and ensure these items are reflected in their wills. Where there are significant variations in value for items such as art, antiques and jewelry, parents can choose to ignore the valuation issue and just leave those personal items to the child they wish. The other option they have is to equalize these disparities in value in their will through cash or other means. For less valuable items with sentimental value, the will should be as detailed as possible. The key is to ensure you minimize the amount of unallocated personal effects not included in your will.

Don't Leave Your Executor(s) in a Precarious Position

In November, 2011, I wrote a blog post titled “Ontario Probate – You may want to plan to Die in 2012 in which I detailed how changes to the probate rules, known in Ontario as the Estate Administration Tax (“EAT”) will now allow Ontario estate auditors four years from the date the EAT is payable to assess or reassess the tax. The consequence of this change is that executors will now have to be extremely careful in distributing estate assets.

I have been informed that where executors are diligent in their duty, they will only be responsible for any EAT assessment or reassessment in their representative capacity. However, most lawyers are still confounded as to whom Ontario will go after if the assets have already been distributed. The general consensus appears to be the beneficiaries will be held liable, but some commentators have suggested that because the issue is far from clear, executors may want to hold back the final distribution for four years, a very impractical solution.

Where assets are undervalued for EAT purposes, or where a Picasso grows legs that allow it to mysteriously walk out the door, executors will potentially have liability and penalty concerns. Parents in all provinces should understand that by not fully documenting their personal effects in their wills, they may be putting their executor or co-executors in an untenable position.

Personal Effects not Listed in the Will

So what does an executor or co-executors do when the last surviving parent passes away and they have not addressed the distribution of all their personal effects in their will? How do executors ensure siblings or relatives of the deceased don't help themselves to these personal assets as has been known to occur on more than one occasion and how do they distribute these assets without creating a family war?

Here are some suggestions:

1. As soon as possible, change the locks on the deceased’s home and ensure all assets are secured in the home. Valuable assets should be put into the deceased’s safety deposit box, if the bank allows such, or put into a new estate safety deposit box
2. Call a meeting of the beneficiaries and make it clear to them that they are not to remove any assets from the home and set out your intended plan of distribution of the personal effects.
3. Inventory and catalog all assets.
4. Get rid of the “junk”. We all accumulate old clothes, furniture etc. Weed out the crap and inform the beneficiaries they should see if there is anything they want or these effects will be donated, or removed by a Junk Removal service.
5. After you have had time to ensure everything has been accounted for and the estate is starting to move forward, distribute the assets that were noted in the will in accordance with the deceased’s instructions.
6. Lastly, comes the hardest part. How do you distribute the deceased’s personal effects that have not been itemized in their will? I have read, heard or seen the following possibilities: 
   
   a) For large valuable assets, attach values and attempt to distribute proportionately, if the assets allow for proportional distribution. First pick could be determined by draw and the person choosing last would then pick first the second time around. If the assets are disproportional, you can auction off the assets for a proposed value. If the value received by one beneficiary exceeds that of another beneficiary, the excess value received can be equalized with cash they have received from the estate or their own funds.
   
   b) For less valuable assets and sentimental assets, see if you can work something out with the family and/or beneficiaries. The beneficiaries can rank the assets one to ten and the assets are then allocated to the beneficiary with the highest ranking of each asset. Alternatively, a lottery can be used or any other method the beneficiaries can agree upon. You just want to distribute assets as fairly as possible while trying to minimize any issues between the beneficiaries.
   
   Parents need to be cognizant of the precarious position they may leave their executor(s) in where they do not itemize and allocate as many of their personal effects as possible in their will. For personal items not listed in the will, executor(s) need to secure, inventory and organize these personal effects and create a plan for distribution of such assets.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Ontario Probate- You may want to plan to Die in 2012

I have discussed probate fees, now known in Ontario as the Estate Administration Tax (“EAT”) in several blogs. Probate Fee Planning is now a cottage industry in Canada, as Canadians strive to minimize this provincially mandated tax.

The EAT (what an appropriate acronym) is paid on the value of a deceased person’s estate when their executor(s) apply for a certificate of appointment of estate trustee (better known as “letters of probate”). Anyone who has had the unfortunate experience of being an executor can attest that without these letters of probate, you have no authority and the various financial institutions will not even to talk to you.

In Ontario, upon applying for the certificate of appointment, the executor must provide a list of the deceased’s assets and their fair market value and pay the EAT on those assets. In Ontario these fees are $250 on the first $50,000 and $15 per $1,000 of assets thereafter. Thus, the EAT on $100,000 would be $1,000 and on an estate of $1,000,000, the fees would be $14,500 . 

Although executors spend hours upon hours compiling the list of assets for the application to get the certificate, the Ontario government often accepts the tax paid without question and often does not follow up or audit the list and valuation of the deceased’s assets.

I recently attended the Ontario Tax Conference where there was some discussion about changes to the EAT legislation. These changes are summed up in this newsletter published by the law firm Cassels Brock titled “Taxed to Death: Heightened Audit for Ontario Estate Administration Tax”.  In this newsletter, the authors Ambie K. Edgar-Chana and Lindsay Ann Histrop discuss the audit and verification powers, as well as assessment powers, that the Ontario Ministry of Revenue will have beginning January 1, 2013. Ontario estate auditors will now have four years from the date the EAT is payable to assess or reassess the tax.

As a consequence of the increase in verification powers, the valuation of assets disclosed in the application will be subject to far greater scrutiny. Executor(s) will be required to assist the Ontario Ministry of Revenue and answer questions regarding the valuation of the estate’s assets. Executors will have to be extremely diligent in obtaining and documenting how they came to the valuation of assets reported on the application. In addition, beginning in 2013, executors will have to be extremely cautious in distributing assets before the end of the four year period, as they could be held liable for any additional probate taxes owing.

The heightened audit requirements in 2013 will likely result in increased liability for executors and will likely be a catalyst for even more probate planning to ensure the value of the estate is minimized for the EAT.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.