The article “Help Your Parents Avoid Probate” was originally published on MoneySense on December 6, 2016.
Should you buy your parent’s home to dodge probate?
Q: My dad wants my brother and I to buy his home in order to avoid probate.
I would like to see him keep his name on his home until he dies.
He said he has a living trust and a living will.
He has been told things need to go through probate and there will be more costs that my brother and I cannot afford.
A: When someone dies in Canada, certain assets they own are subject to probate. Probate is a court process that confirms an executor’s authority in a will to distribute the assets of a person who has deceased. There is a fee to obtain probate.
Jointly held assets or assets that have named beneficiaries will generally avoid probate.
Probate fees differ by province. Notarial wills in Quebec have no probate fee. Estates in excess of $250,000 in Alberta, Northwest Territories and Nunavat have a flat fee of $400. Ontario takes the cake at 0.5% on the first $50,000 and 1.5% on the excess. A $1 million estate in Ontario would, therefore, attract probate fees of $14,500.
Your father has good intentions, Katherine. If he owns a home in Toronto or Vancouver, probate fees could be tens of thousands of dollars.
However, I worry that the advice he has received may not have considered all factors. You see, probate is only part of the equation.
If you and your brother buy his home, of course, you need to come up with the money to do so. I am assuming if you and your brother cannot afford to pay the probate fees on your father’s death, coming up with the cash to buy his home would be that much harder. Your father could take back a mortgage for the full purchase price, I suppose.
Would he then rent the home back from you, Katherine?
More importantly, when you buy a home, even if it’s from a relative, you will have to pay land transfer tax and legal fees. For example, in Winnipeg, you would pay $4,720 in land transfer tax and $1,130 in legal fees to buy a $350,000 home. Your father’s probate fee savings would be only $2,450, but it would cost you $5,850 to do so.
Furthermore, if you and your brother own your homes, your father’s home would likely not be claimed your principal residence. The increase in value from when you buy it until when you sell it would be taxable as a capital gain, Katherine.
Your father could transfer his home into your names. It doesn’t sound like you want that and if I were your father, I wouldn’t want that either. It would amount to an outright gift and if you or your brother had a marriage breakdown, creditor issues or just wanted to sell the house, poor Dad could be out on the street – literally.
Your father mentioned he has a living trust and a living will. I think you want to clarify what he means by this. His living trust may be an inter vivos trust and if so, it may qualify as an alter ego trust. An alter ego trust that holds assets for someone over the age of 65 with no other beneficiaries during their life other than them may avoid probate anyway. So you may want to clarify if your father does indeed have an alter ego trust and if that trust owns his home. His probate fee worries may be all for naught.
A living will, personal directive or power of attorney for personal care doesn’t have anything to do with probate, Katherine. They are documents that outline your father’s wishes for medical decisions and treatment in the event he is incapacitated. A living will simply outlines these wishes, whereas a personal directive or power of attorney for personal care appoints someone to carry out these wishes.
If your father has come to you and your brother to consider buying his house, there is a good chance that you are named as the trustees of his “living trust” or as the decision-makers of his “living will” (assuming it is a personal directive or power of attorney). If you guys don’t know what these documents are, what they say or what your roles are, I’d say there’s a breakdown in communication on important issues between you and your father, Katherine.
You should at the very least be asking your father some questions about what he has in place now and at the very most, take an active involvement in helping him understand his options. It sounds to me like he’s received a generic recommendation to consider the probate fees on his death, but could use some comprehensive professional input that considers all factors.
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.