Sam was confident that he will receive all of his mom’s assets because she left him everything in the Will. I told him, while that is true, he still need to file a probate application, which is the process for the Court to valid the Will. After that, he would need to pool all of his mom’s assets into one estate bank account. This money needs to first pay out all debts and taxes owed by mom, and only after that should he take the rest for himself.
Naturally, Sam feel that this is a lot of work and time. With a valid Will, why can’t he just directly transfer the money from his mom’s accounts to his personal account? Why add an extra step by creating an estate account?
“This is actually good for you,” I told him. You do not want your mom’s liabilities to creditors and CRA to become your own. You don’t want those entities to come after your own funds. By having the inheritance first in the estate account, you can use your mom’s funds to pay off her debts and taxes. Since all the liabilities are already cleared by the time you received your inheritance, you won’t need to worry about anyone coming after those funds.
“And what if the opposite is true?” Sam asked. “What if I transferred the money into my personal accounts without going through an estate account first?”
“Then everything becomes entangled and messed up”, I said. You have to clearly separate which funds are considered inheritance and which funds are your own money. Creditors are not allowed to come after your money and can only come after the estate funds. But if the estate funds is already given to you, then everything becomes one account, and very hard to separate. What’s worse, if the estate funds are not enough to cover the liabilities, you may accidently use your own funds to pay those off. In contrast, if everything was in the estate account first, then it’d be very clear if the estate does not have enough assets to pay off all liabilities. The creditors would need to give up after being shown clear evidence of this.
Of course, this is even more important if there are more than one beneficiary. Let’s say Sam had a sister Sarah, who’s also a named beneficiary in the Will. Then their mom’s estate absolutely need to first go into the estate account. And the funds left, after paying out taxes and debts, would need to be split evenly between the two children.
Having an estate account also make book-keeping easier. Book-keeping should be maintained in case CRA questions any tax submissions, or if any beneficiaries doubt the executors’ spending. Having everything clearly laid out on the estate account first prevents CRA or other beneficiaries from requiring Sam’s personal bank statements to verify interim inheritance distributions and estate expenses. They would only need to examine the estate account, and not Sam’s personal accounts.
At Varity Law, we specialize in Wills & POAs, Probate Applications, and Estate Administration. If you have any questions, please click HERE to book a 1st free consultation.
