Reduce estate administration tax by using this tax planning strategy.
Multiple Wills are used as a tax planning strategy to reduce estate administration tax.
As part of the estate administration process, the personal representative of the deceased may need to obtain a Certificate of Appointment of an Estate Trustee with a Will ("Certificate of Appointment") from the court before they can deal with the deceased's assets. On the filing of the application for a certificate of appointment of estate trustee, estate administration tax is payable at the rate of 0.5 per cent on the first $50,000 of the value of the estate; and 1.5 per cent on the value of estate in excess of $50,000. This amounts to $7,000 in the case of an estate valued at $500,000 and to $22,000 in the case of an estate valued at $1.5 million.
Multiple wills are used to divide a testator's estate into "good assets" and "bad assets". Good assets are assets which the estate trustee will be able to deal with without a Certificate of Appointment such as personal property and shares in a private company. The testator includes all of these assets under one will. Bad assets are assets for which the estate trustee will need a Certificate of Appointment such as real property and certain investment accounts. The testator includes these assets in a separate Will.
Through the use of multiple wills, estate administration tax will only be payable on the value of the assets in the Will which is submitted to the court as part of the application for the Certificate of Appointment. In considering whether to use multiple wills, the testator should weight these benefits against the additional legal fees and the added complexity to the administration of their estate. For instance, if the $500,000 estate referred to above was made up of a $400,000 condominium and $100,000 in good assets, the tax savings would amount to $1,500 - almost certainly insufficient to justify the additional costs and complexity. However, if the $1.5 million dollar estate referred to above consisted of a $1 million home plus $500,000 in good assets, the tax savings would amount to $7,500. Financially, the use of multiple wills deserves some consideration, but the testator would need to decide for themselves, with the help of their advisors, whether the added complexity for both themselves and their trustee is worth it.
It important to emphasize that, like most tax planning arrangements, the use of multiple wills should only be undertaken with the advice of a legal professional. Failure to draft the wills properly can lead to serious unintended consequences, including rendering a portion of the estate intestate.