Trust not in memes when it comes to probate

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Personal finance memes are common on social media. One from the U.S. making the rounds is about eschewing a will and placing all assets in a revocable trust (called a living trust in Canada) as the best way to eliminate probate on an estate.
But this strategy is far more complex than a meme lets on, says Errol Tenenbaum, partner at Robins Appleby LLP’s tax, wills and estates group in Toronto.
Globe Advisor recently spoke with Mr. Tenenbaum.
Why do you think this meme about living trusts has sparked interest?
People want to avoid probate. In Ontario, on every million dollars of assets after the first $50,000, that means paying 1.5 per cent or $15,000 in estate administration taxes, and that can add up quickly. But ultimately, the planning for a living trust has to match the individual’s needs. For the masses, it’s just too expensive and cumbersome.
What makes a living trust so complicated?
You have to transfer all the ownership to the trust. When dealing with a stock portfolio, you have to deal with your advisor and the institution and go through a process of making the transfer. With a home, the title needs to be transferred, and that requires a lawyer and is an added cost to draw up the paperwork. All of this can take a lot of time.
While this can all be done, you have to look at the ultimate benefit. If the intention is saving $15,000, it’s going to cost the client a few thousand in legal fees to start. They’ll have a few hundred dollars in accounting fees each year because there’s separate income tax returns for the trusts.
It often doesn’t make sense for even the ultra high-net-worth (UHNW). There could be immediate tax consequences when transferring the assets, depending on the type of trust. Do they want to trigger a capital gain today, especially with the increased inclusion rate? Do they want to pay tax at the highest rate of over 35 per cent in Ontario today to save 1.5 percent in 20 to 30 years?
One negative consequence of any asset subject to probate is assets are essentially frozen while you go through the probate process. But most techniques to avoid probate [don’t involve] using a living trust.
What are some alternate solutions?
Make sure you have beneficiary designations on all your registered investments.
For life insurance … without a designation, the estate is the designated beneficiary and would be subject to probate.
For UHNW clients, we often look at multiple wills, particularly if they own a business through a corporation. In special circumstances, if they want to maintain control, have privacy and the benefit of avoiding probate, then a living trust such as an alter ego trust may be an option.
What should advisors tell clients about these simplistic memes?
It’s not a one-size-fits-all approach. It’s extremely important to consider the individual’s needs, goals and concerns and then find the appropriate planning for them as opposed to the meme trend of the day.
This interview has been edited and condensed.
– Deanne Gage, Globe Advisor reporter
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