I have spent a bunch of time over the past couple of months reviewing students’ Capstone course work, as they pursue the CFP® Certification. While it is not new to me, a pattern that I see is that financial advisors tend to present the avoidance of probate as a virtue. While I do agree that there are scenarios where it is ideal to bypass probate, I also find that it’s rarely considered as to whether going through probate might actually be beneficial. Alternately, if bypassing probate is useful, are insurance products (seg funds, accumulation annuities) the best means? Consider the proverb, “If the only tool I have is a hammer, every problem looks like a nail.”
First, let’s consider the direct costs of probate. In the worst case, in Nova Scotia, the direct costs of probate will be 1.695% of the value of an estate on the value in excess of $100,000. For other provinces, maximum probate fees are: AB: $400; BC: 1.4%; MB: .7%; NB: .5%; NL: .6%; NWT: $435; NU: $400; ON: 1.5%; PEI: 1.4%; QC: $202; SK: .7%; YT: $140.
Indirect costs are a separate issue. I have certainly seen cases where a lawyer or trustee takes advantage of the ability to charge the estate based on assets that flow in and out. In more complex estate cases, I am generally a fan of the involvement of a professional executor. An important component of choosing that executor is understanding the fees, and the value those fees will bring. A poorly planned estate is often eaten up by fees, and the family will tend to blame the lawyer who is handling the estate, while the lawyer will be left with no defence but to blame a shoddy will. Proper estate planning will reduce unnecessary expenses.
In addition to indirect costs, putting assets through probate will expose them to public scrutiny. Creditors will be able to claim against probates assets. Potential heirs who feel they were left out of an estate will be able to file claims. Consider, though, that most people will need to get their debts paid off on death. If I own a house when I die, and it has a mortgage against it, there should be some plan in place to deal with that mortgage. If that plan happens to be to sell the house and pay off the mortgage, that’s great. But that plan should be contemplated. There might be concerns about liability claims, for example. That is why we advise our clients to carry proper liability insurance, and to use corporations to house their businesses.
The desire for confidentiality often arises from a fear of communicating with family members about the estate plan. Is your client planning to disinherit a child? Is your client planning to leave a substantial amount of assets to a favoured child? In either case, no matter what confidentiality provisions the client has put in place, there is a strong possibility that the disadvantaged parties will figure out what happened. This is what leads to bad blood among the heirs, and potential lawsuits against the estate. I would encourage you to encourage your clients to communicate with their heirs before dying. This can save complications in the estate. For the unfortunate executor left to explain an unbalanced will, this can preserve family relationships.
The probate process can provide genuine value. In cases where a beneficiary’s circumstances have changed, the courts can step in and adjust inheritances. For example, a client may have written a will when their three young adult children were all healthy. What if, since the client wrote a will, one of the kids is dealing with a serious disability, and is dependent on their now-deceased parents? The courts may be able to use the probate process to ensure the welfare of that child. What if a charity that was named in the will has since lost charitable status? Again, the executor can work with the courts to rectify such a problem.
There is a ‘live by the sword, die by the sword’ element to this. In many cases, I see an argument made that the client should buy insurance products to avoid probate. The client shops around a bit, and discovers that joint ownership, or an inter vivos trust, or a second will, can also avoid probate, and all of those options will have lower initial costs than most insurance solutions. If the advisor recommends insurance based principally on probate avoidance, this can end up sending a poorly-educated client down a bad path. If the client has been educated about the positives and negatives of probate, and determines that insurance is the right solution to a problem, that’s great.
Probate can be an expensive and cumbersome process. In some cases, it may be better to avoid it. But we should not default to the position that probate is a negative outcome. We can educate our clients and help them to make the right decision for their circumstances. I would encourage you to deal with insurance on its own merits, the primary one being that it puts a lump sum of cash in the right place when needed. I would also encourage robust family discussions and the use of skilled and qualified advisors when it comes to the estate plan.