In light of the unpopularity of the estate administration tax as well as the effort and expense involved in obtaining probate, there is a strong incentive for the estate representative of a small estate to avoid probate and distribute the assets informally. However, in addition to the loss of legal protection, there are also other challenges associated with avoiding probate. In this section, we explore the option to administer a small estate outside the probate system.
A. How often Are Small Estates Administered without Probate?
As noted above, more than three quarters of Ontario estates are not probated. This is not a particularly helpful statistic since it also encompasses larger estates that have been carefully structured to avoid the need for probate. As one practitioner pointed out, the result is a curious and incongruous system in which mid-sized estates tend to be probated but the largest and smallest estates are not.
People tend to avoid probate not only because they cannot afford it but also in order to circumvent the tax requirement, as well as the administrative process. More than one stakeholder attributed the problem with the probate system to the tripling of estate administration tax in the 1990s. Before this, there was apparently little fuss around probate. Nevertheless, the process itself can also be a deterrent. As discussed in the previous section, the process can be intimidating and confusing for laypersons.
Practitioners described clients going to great lengths to avoid probate even where the estate administration tax payable was relatively small. For example, one client was adamant about avoiding probate to save $6,000 in estate administration tax in spite of the fact that it would compromise the testamentary plan for a $400,000 estate. Another practitioner referred to the “weird” compulsion that many people have to avoid probate and noted that they may end up spending more money on dispute resolution than they save in tax.
One individual stakeholder described administering an estate without probate even in the face of roadblocks put up by a financial institution:
The…bank forced me at the last moment when I didn’t go the Probate route to provide all sorts of personal financial asset information before they would release the Estate Funds to the heirs. They released Estate funds to pay Estate creditors but then change their regulations internally, I was told, and wanted personal declaration of my financial assets that were much greater than the value of the Estate in question.
One consequence of this trend to avoid probate wherever possible is an increased risk of financial abuse. Many practitioners and other professionals were aware of financial abuse in the form of putting property into joint ownership in order to avoid probate. For example, one practitioner described an estate in which he acted as both executor and lawyer. Family members convinced the testator to put property in joint ownership shortly after the will was executed. When the testator passed away, this allowed the family members to avoid probate, ignore the provisions of the will and avoid dealing with the executor. Unlike many stakeholders, this practitioner did not approve of probate waivers by banks. His view was that the practice of banks waiving probate was short circuiting the legal protection intended by the system:
My experience is that banks particularly disrespect the process by offering to let executors and administrators to have access to funds up to $100,000 by providing an indemnity so the bank is off the hook for liability. They don’t seem to care about beneficiaries, spousal claims, creditors etc. and individuals signing these things don’t know the legal implications. It is also my view that it isn’t just the monetary value of an estate which is important but also the legal issues surrounding an estate.
Another practitioner took the view that banks should not release assets without probate since this sends the wrong message to estate representatives. This individual commented,
Too many estate representatives do not take their job seriously. They are okay at organizing information and some general administration tasks but they are lax in reporting to beneficiaries and filing tax returns or locating creditors. Sometimes this is a result of long-standing family feuds. Probate sends a message that someone who takes on the role of ET [estate trustee] needs to be very serious about doing a good job, acting reasonably, and prepared to accept personal liability.
Anecdotal evidence suggests that there is an established practice of avoiding probate particularly for small estates, although there are no numbers to gauge it. Next we consider the effect of this practice on the financial and other institutions that hold estate assets.
B. Duty of Financial and Other Institutions to Safeguard Assets
Institutions holding a deceased’s assets have a legal duty (statutory or common law or both) to safeguard those assets on behalf of the deceased. The assets may be transferred only to an estate representative who is legally authorized to receive them on behalf of the estate. The scope of the institution’s duty to establish this legal authority is generally a matter of interpretation. As noted in section IV.B above, institutions tend to interpret these provisions strictly.
For example, the federal Bank Act allows banks to rely on provincial probate systems as evidence of authority to receive the deceased’s assets. Section 460 provides that the delivery to the bank of an affidavit explaining a request for payment, along with a grant of probate, grant of letters of administration or “other document of like import”, constitutes sufficient authority for the bank to make the payment. However, the section also reserves the bank’s right to refuse to make payment unless additional evidence is provided.
The point of this provision is to protect banks from liability if they release assets on the basis of a Certificate of Appointment (COA) or other court-issued document but it later turns out that the recipient was not legally entitled to the assets after all. It allows banks to accept a COA as proof of authority but it does not require that banks accept a COA and, in fact, it reserves the right of banks to require other such proof as deemed necessary. That being said, in practice, banks rely on section 460 of the Bank Act in seeking proof of probate before releasing assets. The banks may exercise this right to require probate even for assets having designated beneficiaries.
The analogous legislation applying to Ontario credit unions is more flexible than is the Bank Act provision. Section 42 of the Credit Unions and Caisses Populaires Act, 1994 exempts credit unions from liability where they release amounts less than $50,000 to estate representatives without probate so long as the credit union acts in good faith and seeks evidence of the person’s entitlement to receive the money.
Nevertheless, the LCO heard in consultations that credit unions also tend to take the position that probate is required before releasing assets to an estate representative. Where they do agree to waive the probate requirement, credit unions impose a 30 day waiting period before releasing estate monies in order to give other family members the opportunity to assert a claim.
Credit unions often have longstanding relationships with their members. The representative body for Ontario credit unions reported that the probate system can be “prohibitively expensive and complex” for their members and it supports the idea of a simplified procedure for small estates.
Insurance companies also have the challenge of determining whether or not a particular beneficiary or estate representative is entitled to receive a payout when the insured dies. The legislative requirements for life insurance companies are particularly vague in this respect. Section 203 of the Insurance Act provides that an insurer has thirty days to pay out insurance money on receiving “sufficient evidence” of an event upon which the money becomes payable and the right of the claimant to receive the money.
Although the provision does not specify what evidence will be sufficient to establish the claimant’s right to receive payment, the practice of life insurers has generally been to require the executor to probate the will. However, this is not a mandatory requirement.
Section 207 of the Insurance Act also gives life insurers statutory protection from liability where they have not received authoritative evidence of the right to receive insurance money and they have mistakenly paid insurance proceeds out to the wrong person (presumably in accordance with section 203). The provision does preserve the rights or interests of any person other than the insurer. Therefore, the proper recipient would still be able to make a claim for the proceeds directly against the person who mistakenly received them.
In a written submission, the Canadian Life and Health Insurance Association Inc. supported the idea of a simplified process for small estates “since court supervision is not economically feasible for majority of the smaller estates”.
There are similar legislative provisions applicable to other institutions and particular kinds of asset transfers, none of which is entirely clear about the scope of the institution’s duty to protect against the release of assets to an unauthorized person. As a result, from the perspective of these institutions, releasing assets without probate leaves them open to a significant risk of liability.
This risk was realized in the Court of Appeal decision in Monteiro v. Toronto Dominion Bank. A Kuwaiti family was in litigation over the validity of the mother’s will which had left all her assets to her daughter. Before the will challenge had been settled, and contrary to its own internal procedures, Toronto Dominion Bank released the mother’s assets to her sons. Once the will was ultimately determined to be valid, TD was held to be liable to the daughter for the missing assets. As the Court reasoned,
…[T]he situation TD finds itself in is the product of it having ignored its own internal procedures and thereby having paid the wrong party. In that regard, TD was the author of its own misfortune. Its internal procedures were designed to prevent this exact situation from occurring, but having chosen to ignore these procedures, TD now finds itself liable to [Daughter] for the funds in the account. I see no injustice in this result.
Even where there is little or no legislative guidance, institutions have developed policy to address the issue of what evidence of authority should be required before releasing assets. There are a myriad of these policies for different institutions and different types of assets. These policies generally vary depending on whether or not there is a will.
For example, transferring Canada Savings Bonds can be a problem since it is not possible to designate a beneficiary on these. Even in small estates, these may not be released without probate. However, a detailed policy has been created providing for their release depending on their monetary value and the identity of the estate beneficiaries.
A deceased’s motor vehicle may generally be transferred to an executor on providing the Ministry of Transportation with a copy of the will. Where there is no will, it may be transferred in certain circumstances where the beneficiary obtains a lawyer’s letter stating his or her entitlement or, where there is more than one beneficiary, stating that the other beneficiaries have no claim on the vehicle. According to one practitioner, this can be a problem in some circumstances: