In Canada, most type of inheritance does not happen “automatically”. No, it’s not like on TV – the deceased lawyer reads a Will, and the beneficiaries just get their share. Instead, most assets will be frozen. The beneficiaries would need to apply to the Court for an approval document to get it unfrozen and passed down to them. This application process is called probate. As part of probate, the Court may require the applicant for estate trustee to provide “security” in the form of an estate bond insurance policy.
Why is estate bond insurance needed
There are several ways in which the estate distribution can be done wrong, as we will explain below. To prevent mistakes and any beneficiaries from not getting their share of the inheritance, the Court would require the purchase of this bond insurance.
Unfortunately, because the estate funds are frozen, the money required to purchase this policy must be paid from the applicant’s own funds and cannot be paid from the estate assets. To make things worse, this policy can cost up to 5% of the total value of the estate. To illustrate, if Walter’s estate is worth $2,000,000, the applicant would need to pay $100,000 to purchase the insurance policy and there is no guarantee how much, if anything, may get returned by the insurance company later when the executor says they have completed their estate trustee duties.
Lastly, depending on your level of risk, much like with other types of insurance, you may not even be able to find an insurance company willing to cover you. For example, if the bond insurance company does not believe you will be able or willing to fulfill your duties as an estate trustee, they could deny you coverage. Then, like we often see with insurance applications, it becomes even more difficult to obtain insurance once you have been denied coverage.
While your lawyer will do their best to have any bond requirements waived, this is often not possible and, if the court demands the applicant purchase the insurance, the applicant must purchase the insurance, or they will not be approved as the estate trustee.
So, for the reasons listed above, it is essential that precautions are taken to reduce the risk of a bond requirement upon your passing. But what can you do today to help ensure your estate trustee will not require a bond policy when you die?
Let me give you four tips that can help eliminate, or at least reduce, this risk.
#1: You need to get a Will
In most cases, you do not require an estate bond policy if you have a properly drafted will. There are several logical reasons for this rule.
If there is no will, the estate is distributed according to legislation and the beneficiaries are not certain, like they would be if there was a will. When there is no will, the estate assets are distributed as follows:
- If there is a legally married spouse, the first $350,000.00 from the estate will go to the spouse. This amount is referred to as the “preferential share” and is subject to change, like we saw in 2021. In fact, if the deceased died prior to March 1, 2021, the preferential share is only $200,000, but is $350,000.00 if the deceased died after that date.
- After the preferential share, if the deceased has children, the remaining estate is distributed amongst the spouse and children as follows:
- If the deceased had a spouse and 1 child, the remaining is divided equally between the spouse and child.
- If the deceased had multiple children, 1/3 of the remaining goes to the spouse and the rest is divided amongst the children.
- If there is no spouse or children, the estate will be the inherited by the deceased’s parents.
- If no spouse, children or parents, the estate is inherited by the deceased’s siblings.
- If no spouse, children, parents or siblings, the next surviving next of kin.
- If no next of kin, the estate goes to the government.
If there is no will and there is only a spouse and the estate is below the preferential share, meaning the spouse inherits everything, a judge may waive the bond policy in accordance with the Estates Act. In this case, since the risk very low, the requirement of purchasing the bond insurance can be waived, but this must be formally requested when applying for probate. You must also convince the judge that there are no other risks, like debts, that would require a bond policy.
If there is no will and the spouse isn’t the sole beneficiary, this could increase the risk so the court will require a bond policy. In Canada, family structures and debts are not all listed with the government. For this reason, the court cannot verify potential creditors or family members to ensure the estate is properly administered. For example, if a father dies leaving behind a daughter and a son, but the son applies to be the estate trustee claiming he is the only child, the court would have no way to catch the lie and would probably approve his application. Once approved, the son could take all of the inheritance for himself, leaving the daughter with nothing. Sometimes, the only way to ensure things are done properly is to require the bond policy. Because the estate trustee can get a partial refund for the policy purchase price (appx. 5% of the estate) if they prove that they paid all beneficiaries properly, there is a strong incentive to do things properly and if the son does steal the money from the other beneficiaries, they can go after the insurance company for compensation.
However, if there is a will, the above risks are removed because the Will specifies who gets the inheritance. For example, if the Will says the son and daughter will each get 50% of the inheritance, then the son cannot just take the entire estate for himself.
That’s why, with a Will, the court will most likely not require a bond. Of course, this is a very simple example, and there are many complex cases we have seen where bonds may still be required or where several factors must be satisfied for the court before they will waive a bond. For example, multiple marriages, illegitimate children, the complex transnational history of immigrant families, etc.
#2 Ensure the Will lists the beneficiaries properly, lists the estate trustee properly and declares that no bond is required
Simply having a Will is not enough. You must have an effective and well-drafted Will to ensure the bond policy is not required.
For starters, you must ensure the Will correctly lists the beneficiaries, by name and not just class, like “children”. Ideally, your Will should say the person’s name and class, like, “I give my real estate to my son, Harry Jones.” Why? Because how would the judge know who are all your children? What if the above example of the son falsely claiming he’s the only child to the estate happens? Thus, when a Will is not clear, a judge may require a bond policy before approving the application.
Since it is essential that the exact beneficiaries be included in a will, we always tell clients to include the full legal name of their chosen beneficiaries and to simply update their Wills later if they require the addition of another child or grandchild, for example.
In addition to listing the beneficiaries, the Will must clearly specify who are the estate trustee is. If the estate trustee listed in the application is not the estate trustee listed under the Will, or if it isn’t clear, the court will require the bond policy. For this reason, we would never suggest that a Will simply designate a person’s estate trustee by referring to their class. For example, you would never want to designate your estate trustee by simply saying, “I appoint my wife to be my estate trustee.” You would always want to be as clear as possible by saying “I appoint my wife, Barbara Ann, to be my estate trustee.
It is also essential that the deceased declares that no bond is required. Normally, when a Will states that no bond insurance is required, a Court will follow this request from the deceased. This recognizes the fact that the deceased trusted the named estate trustee enough to not require the bond.
#3 Is there a clear conflict of interest between the executor and the beneficiaries?
We once had a case where the divorced wife applied to be the executor of her ex-husband’s estate. The only beneficiary is their underaged daughter.
In that case, the Court felt there could be a conflict of interest between the divorced wife and her daughter. What if mom took away all the daughter’s inheritance, and splurged it on herself? Hence, the Court required bond insurance.
Anytime the Court perceives that there may be a conflict of interest between the executor, the person distributing the estate, and the beneficiary, the person receiving the estate, AND there is no Will to say otherwise, the Court will require bond insurance.
#4 Avoid having Minors as Beneficiaries, if possible
Even if you have a Will, a court will likely require a bond policy any time there is a minor beneficiary. While it is not always possible to avoid having minor beneficiaries, it is important that you understand the consequences of your decisions.
In some cases, it may make more sense to leave money through a trust.
In the context of estate planning, real estate secured lending can be a viable strategy to mitigate risks associated with bond requirements and ensure smoother administration of the estate.
Alternatively, you can leave a larger inheritance to a minor’s parents, but this is not without risks, as the inheritance would legally be the parents’ and not the minor’s, so there would be no protection for the minor.
Summary
Getting estate bond insurance when applying for probate can be an expensive obligation. It is usually 5% of the total estate, and the executor needs to pay it out of his own pocket before he can obtain approval, unfreeze and transfer the estate.
If you want to avoid it, you should write a detailed Will in advance, carefully indicate who the beneficiaries are, and add a clause that does not require the purchase of bond insurance.
For guidance on creating a comprehensive Will that addresses your specific needs, consider consulting a wills and estate lawyer in Richmond Hill.
If you would like to discuss how you can ensure your beneficiaries will not be burdened by the requirements to get a bond policy, please book a 1st free consultation with us here: https://calendly.com/sabrina-668/1stfreeconsultchinese
Jonathan Thibert is one of the lawyers at Varity Law. This blog is meant to be used as general legal information and not for specific legal advice. For specific advice pertaining to your situation, please book a 1st free consultation with us.
