In Ontario, when we pass, most of our assets will be frozen. Our beneficiary must apply to the Court to receive a probate certificate (also called appointment of estate trustee) before they can get their inheritance.
This application involves the Court approving an executor (also called estate trustee), or a manager, to administer the estate. Where there is a Will, the Court’s job is simple. They just need to examine to see if the Will is valid or correctly written. If it is, then the executor named on the Will would be approved.
However, when there is no Will, the Court would need to look at the legislation, which names the deceased’s most recent spouse and all of the deceased’s children as 1st beneficiaries. This means that if the deceased has spouse and/or child(ren), then they would be the only eligible beneficiaries.
When the Court considers the application, they assess how risky it is to approve of an executor. If the Court decides that it is very risky, then they will ask the applicant executor to purchase a bond insurance. This costs approximately 5% of the total estate value. If the estate is administered incorrectly, resulting in any beneficiaries receiving less inheritance than they deserve, the bond insurance will compensate that beneficiary.
In what situations would the Court think it’s a risky application that requires bond insurance?
First, when the Court is uncertain about the identities of the beneficiaries.
As stated above, spouse and children are the 1st beneficiaries if there is no Will. But how can the Court be sure who is the deceased’s most RECENT spouse and who are ALL of the deceased’s children? This is especially difficult if the deceased have lived abroad for a while and may have gotten married and had children in other countries. If the Court appointed an executor who missed beneficiaries when distributing the estate, then the bond insurance can pay for it.
Second, when the Court worries that the executor may take the inheritance themselves and NOT give it to the beneficiaries.
This usually happens when there is NO will and the executor and beneficiary are not the same person. For instance, an ex-spouse who gets nothing according to legislation is a bad executor candidate for the deceased’s child who is getting everything according to legislation. In this case, the Court will likely require the ex-spouse to buy bond insurance before giving her access to the estate funds.
Third, when the executor is NOT a long-term resident of Ontario.
Before our beneficiaries can receive their inheritance, most of our assets need to go into a centralized estate account first. This is because our debts and taxes should be paid first by the executor using the estate funds. Only after those are paid first, should the executor distribute the rest to the beneficiaries. When the executor is a foreign resident, the Court is not confident that he/she will duly pay taxes on time. Thus, the Court will likely require bond insurance.
So, since no one wants to pay the 5% bond insurance, what are some ways to get around it?
Three Ways to Avoid the Bond Insurance
First, hire an estate lawyer to write a valid Will.
The key is finding an estate lawyer and not just a Will lawyer. Your Will is to be used when you pass. Anyone who doesn’t do probate application or estate administration likely won’t have the practical experience needed to write a valid Will.
A common mistake that many inexperienced Will writers make is not specifically naming your executor and beneficiaries. For instance, saying your beneficiaries are your spouse and children is not good enough. How will the Court know who ARE your most recent spouse and all of your children? Instead, you must specifically name them. For instance, my spouse Julie Smith, DOB…. my two children Liam Smith DOB… and Lianna Smith DOB…This will remove the Court’s worry about missing beneficiaries.
Also, your Will should have a bond exemption clause which clearly states that you don’t require a bond to be purchased. This eliminates the Court’s concern that the executor would misuse the funds, since you clearly trust the executor as shown on your Will. I also recommend making the executor and beneficiary the same person, as long as the executor is above 18 and an Ontario resident. This would mean no conflict of interest between the executor and beneficiary, since they are the same person.
Second, appoint a good estate lawyer as the executor.
if you can no longer write or update the Will (e.g. deceased already passed and then you found out about bond insurance requirement), you can appoint a good estate lawyer as the executor instead. Ontario lawyers have professional insurance and would be audited by Law Society when they become executor. So, the Court is not really worried about them and won’t likely require bond insurance. For more info about lawyer as executors, click HERE.
Third, you can prepay the probate taxes.
This is especially helpful for foreign executors, but only if they are named executors on the Will. Under legislation, if there is NO Will + the executor applicant is NOT an Ontario resident, the Court will likely reject the application. Regardless, as an increasing number of approved executors are not paying probate taxes (costing 1.5% of the entire estate) on time, the Courts begin to demand payment when the probate application is submitted, instead of waiting for 180 days after probate is approved.
Of course, no one wants to pre-pay this amount out-of-pocket unless it’s the last resort. Before you do that, you can hire an experienced estate firm to get the deceased’s bank to pay it first. While most banks are unwilling to authorize any withdrawals until they see probate approval, an experienced estate law firm can convince them that there’s no risk in issuing this tax payment to the Ministry of Finance. This amount would have to be paid by the estate, regardless of who is named on the probate approval as executor. We have succeeded many times in getting the deceased’s bank to prepay the probate taxes without the executor having the should the cost first.
In summary, the 3 ways of avoiding the bond insurance requirement are:
- have a valid Will drafted by a law firm who also do probate and/or estate administration,
- appoint an estate lawyer as executor if deceased already passed without a Will, and
- prepay the probate taxes (either the executor can pay this themselves first and be reimbursed later, or the executor can hire an estate law firm to get the deceased’s bank to prepay this tax).
Keep in mind it is much easier to prevent the Court from asking for a bond by using those methods, instead of convincing them to remove the bond requirement when the Court already asked for bond.
For any questions regarding Wills and POAs drafting (estate planning), Probate Application, or Estate Administration, book a 1st free consultation with us by clicking HERE.
