The Advantages of Implementing a Secondary Will

4/21/2024

Maximizing Your Legacy: The Advantages of Implementing a Secondary Will

Introduction: A common query often posed to wills and estate lawyers is, "How can I minimize government taxes on my estate?" While the proper answer often depends on the circumstances of the client, a potential strategy for many individuals is the creation of a Secondary Will. This additional legal document, which works in conjunction with the Primary Will, can offer significant benefits by effectively separating assets that are subject to and require the formal probate process from those that are not.

Understanding Secondary Wills: A Secondary Will, as the name implies, is a supplementary document that complements the Primary Will. The Primary Will specifically addresses only those assets requiring the probate process before they can be administered, while the Secondary Will governs those assets that can be administered without the need for probate. This strategic estate planning approach allows for the payment of Estate Administration Tax ("EAT") exclusively on assets governed by the Primary Will, resulting in potential substantial tax savings for the estate.

Probate and Estate Administration Tax: Upon one's demise, the assets owned at that time collectively form the Estate of the deceased. Probate is the procedure to apply and ask the court to either: give a person the authority to act as the estate trustee of an estate, confirm the authority of a person named as the estate trustee in the deceased's will and, formally approve that the deceased's will as their valid last will. Probate, is typically required for assets such as real estate, bank accounts, and investments. EAT, calculated at 1.5% of the total estate value (with exemptions for the initial $50,000 of the estate), is incurred only when probate is necessary. Notably, assets like jointly held properties and applicable plans and policies (e.g.RRSP’s, RRIF’s, life insurance) with designated beneficiaries generally bypass probate.

The Challenge: Certain assets, such as shares in private corporations do not require probate. However, if even one estate asset necessitates probate, EAT is applied to the entire estate value, including exempt assets. A Secondary Will effectively addresses this issue by segregating non-probate assets, leading to a reduced taxable estate value.

Tax Savings Example: Consider an estate with a home valued at $750,000, a bank account with $200,000, and shares in a private corporation valued at $1,000,000. In the event that the deceased only had a Primary Will, the ETA payable on the value of the assets would be $28,500. With a Secondary Will, EAT applies only to the probate-required assets, being the home and the bank account, resulting in $15,000 in tax savings compared to a scenario with only a Primary Will, as the value of the shares in the private corporation are not included in the value of the estate under the Primary Will.

Additional Benefits of Secondary Wills:

1. Real Estate outside of Canada: Multiple wills can be advantageous when owning foreign property, streamlining the estate administration process, allowing you to tailor your Secondary Will to conform with the laws of the applicable foreign jurisdiction.

2. Real Estate (First-Dealings-Exemption): A Secondary Will can waive probate requirements for certain Ontario properties being dealt with for the first time since being converted to the Land Titles System from the old Registry System.

3. Confidentiality: Secondary Wills can protect the privacy of assets and beneficiaries, as probated wills become public records, and the Secondary Will is not.

4. Other Valuable Assets: Expensive non-probate assets, like jewelry, and artwork can be excluded from EAT calculations by incorporating them into a Secondary Will, as these assets do not require probate to be transferred.

Conclusion: While tax savings are a primary advantage of implementing multiple wills, preparing a Secondary Wills offers a range of other benefits, including streamlined estate administration, confidentiality, and the exclusion of certain valuable assets from taxation. Consultation with an estate lawyer is recommended to tailor this strategy to individual estate planning objectives.

A common question wills/estate lawyers are asked is:

what can I do to minimize paying the government taxes? There is no one-size-fits-all answer, but for many individuals, preparing a Secondary Will is a great option.

A Secondary Will is exactly what it sounds like – it is a second Will, which works in tandem with a first Will (often called the “Primary Will”) to separate the assets that require probate, from those that do not.

One Will (the Primary Will) covers only the assets that require probate, whereas the other Will (the Secondary Will) is not submitted for probate and governs only the assets that can be administered without probate.

When used properly, this estate planning strategy means that Estate Administration Tax (“EAT”) is paid only on the assets governed by the Primary Will, and not on the assets governed by the Secondary Will. The tax savings can be quite sizable.