The use of Dual Wills, or Multiple Wills, was and remains an effective estate planning strategy used primarily to help a deceased’s estate pay as little Estate Administration Tax (“EAT”) as possible. Currently in Ontario, EAT is calculated to be approximately 1.5% of the entire value of the deceased’s estate. Included in the value of an estate would be all assets owned or registered solely in the deceased’s name and would include, for example, investment and bank accounts, shares in a private and/or public corporation, vehicles, and any interest in real estate owned solely or as tenants-in-common.
It is important to understand that EAT is only paid when it is necessary for an Estate Trustee (executor) to apply to the court for a Certificate of Appointment Estate Trustee With/Without a Will (more commonly known as “probate”). Although a Will is effective in the moment of death, in certain cases someone—usually the Director of Ontario’s Land Registry Office, bank or investment dealer –requires that the Court validate the Will of the deceased. For example, probate is often required in situations where a deceased had a large bank account in their sole name with a financial institution: before the financial institution will release the money to the Estate Trustee, the institution want to be sure that they are paying the proceeds of the account to the legally authorized Estate Trustee, and as such will require the Estate Trustee to apply for probate and have the Court verify their appointment as Estate Trustee, assuaging the institution’s fears and liability of paying the funds to the wrong person.
There are also certain assets that commonly do not attract a request for probate, such as shares in (or loans to) a private corporation, like a family business. Assuming that the deceased owned 100% of the shares in the private corporation at the time of their death, their Estate Trustee named in their Will has authority to step in the shoes of the deceased shareholder and sign a Director’s resolution transferring the shares to the Estate Trustee then to the beneficiary in the deceased’s Last Will. This can be done without the need for probate of the shareholder’s Will.
The problem is that if the shareholder has only one Will, and another asset – such as a bank account – is necessitating probate, then EAT will be levied on the value of ALL assets governed by that Will, regardless of whether probate was not required to release some assets to the Estate Trustee. Enter the value of the Dual Will.
Simply speaking the purpose of the Dual Will is to separate your assets into two categories: those which will likely require probate in order to transfer to your Estate Trustee, and those which will not. In effect, you will be creating two estates. To use our example, the large bank account solely in the deceased’s name would be defined to be part of your estate called your “Primary Estate” governed by what is typically called your “Primary Will” (the Will which will undergo probate) and the private family company shares would be defined to form part of your Secondary Estate under the province of your “Secondary Will” (the Will which will not require probate). The benefit is that upon death, EAT will only be owed on the value of those assets under the Primary Will, which are the assets that would require probate in any event. The Secondary Will avoids throwing the tax-saving baby out with the bath water, and allows the Estate Trustee to deal with estate assets without the need for court validation, and by extension without any EAT owing. Other assets which are typically included as part of the secondary estate in the Secondary Will include: personal property items (automobiles, jewelry etc.), private loans, partnership, interests, and interests in family trusts, etc.
While Dual Will plans are typically more expensive, the cost/benefit analysis makes this type of planning extremely desirable for the right client. If, for example, your shares in a private company are valued at $1,000,000, by using the Dual Will plan you would save about $15,000 in EAT.
Another benefit enjoyed by the Dual Will plan was the ability of the Executor to select which assets fell under either the Primary or Secondary Will. If, for example, an asset which would have to be dealt with under the Primary Will no longer required probate for whatever reason, then the Estate Trustee would be able to deal with this asset under the Secondary Will and avoid the EAT which would otherwise be owed had it remained under the Primary Will. However, in a recent decision from the Ontario Superior Court of Justice, Re Milne Estate, the court held that this discretion to “pick and choose” assets violated Trust Law with the result that the deceased’s Dual Will was defeated and no EAT was avoided. Some legal commentators question whether this ruling has a widespread effect on all Dual Will plans where the Estate Trustee has such discretion or whether it is unique to the fact scenario in the Milne case. Accordingly, this case is currently being appealed. Nevertheless, it is very important that all Dual Will plans be reviewed to remove any provision that could be seen as giving the Estate Trustee any degree of discretion tantamount to what was present in the Milne case. You should consult your lawyer as soon as possible to determine whether a Codicil should be prepared, at least until the appeal is heard, so that the problem is remedied for the time being. The benefits of the Dual Will plan are overwhelmingly still desirable and are still possible, but the drafting of the Wills and the freedom of the Estate Trustees need to be handled cautiously.