Do You Have Wealth In Private Company Investments?
If So, You Should Consider Drafting Multiple Wills
By: Konstantine Chatzidimos
The key reason to invest in a properly-drafted will is the assurance that your intended beneficiaries will be provided for to the best of your means on your passing. Implicit in this expectation is the desire for the bulk of your estate to pass to your loved-ones with minimal taxation.
If you hold wealth in the form of private company shares, the estate planning strategy of multiple wills can save your estate a considerable sum in estate administration tax. This is done by reducing the value of the estate requiring administration, or probate, through separating out the assets which can pass to beneficiaries without requirement of probate and disposing of them in one will, while the assets requiring administration are disposed of in a second will.
For those unfamiliar with this term, “administering” a will is the process of the executor, or estate trustee, applying to the Court to obtain its authority to act in the estate’s name. The estate trustee applies for what is called a “Certificate of Appointment of Estate Trustee with a Will”. This is generally required when the value estate assets is high – generally over $25,000.00 – or in cases where the estate is comprised of certain specific types of assets such as publicly-traded securities, and Canada Savings Bonds. Many banks, stockbrokers and other institutions require this Certificate from the Court before they will let the estate trustee deal with certain assets of the estate.
The fee associated with obtaining this Certificate from the Court is the estate administration tax referenced above and it is based generally upon the gross value of an estate. The tax is $5.00 per thousand on the first $50,000.00 value of an estate, and $15.00 per thousand on the balance of the estate’s value. By way of example:
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a modest estate of $150,000.00 would attract Estate Administration Tax of $1,750.00;
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a larger estate of a quarter million dollars would attract Estate Administration Tax of $3,250.00; and;
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a million dollar estate would attract Estate Administration Tax in the amount of $14,500.00.
Bear in mind that there is no upper limit on this tax amount
As noted above, effective estate planning can help avoid the attraction of at least part of this tax though the reduction of the value of the estate requiring administration. As privately-held shares can be transferred without obtaining probate, it is advantageous to dispose of such assets through a separate will which will not be submitted for probate.
In the absence of such an additional will, the entire gross value of your estate would be included for the purposes of obtaining probate; thereby resulting in a needlessly higher Estate Administration Tax.
The key point here is that not all of the assets of a deceased are required to pass through the courts. Therefore, the way to cut down on the Estate Administration Tax is to separate out the assets that can pass to beneficiaries without need of a Certificate from the Court – and place them in one will, while the assets that require such a Certificate are disposed of in a second, separate will. This estate planning strategy would be beneficial as a notable portion of his estate’s value is currently in the form of shares in the Corporation.
A brief example will illustrate what I am talking about. Let’s say someone left behind an estate valued at $2,000,000.00 – comprised of $50,000.00 in cash in a bank account – and $1,950,000.00 in shares in a privately-held corporation. In order to give the Estate Trustee access to the $50,000.00 from the bank, the bank will require the Court Certificate I mentioned earlier. As such, Estate Administration Tax in the amount of $29,500.00 would have to be paid on the full $2-million value of the estate before the Certificate is handed over by the Court.
As you may be able to guess, the solution to this problem is the execution of two wills by the testator. One will for the assets which must pass through the Court, i.e., the bank account. And one will for those assets which do not have to pass through the Court, i.e., the shares. In this example, an application for a Certificate of Appointment of Estate Trustee would then be made for the will dealing only with the $50,000.00 which was in the bank, and Estate Administration Tax of only $250.00 would be paid by the estate.
Since the transfer of shares in the private company does not require a Certificate of Appointment of Estate Trustee from the Court, the value of the shares would not be submitted to the Court. This way, the estate has just saved $29,250.00 in Estate Administration Tax.