When to use dual wills

During his lifetime, Philip Granovsky cut a broad swath across Toronto’s business community. He founded a major packaging firm, served as a director of the first Israeli bank to set up shop in Canada, and helped bring professional basketball to the city. He raised money for United Jewish Appeal.

And, during the 1989 free trade debate, he broke ranks with the Tories, urging his employees at Atlantic Packaging to oppose the deal, saying it would lead to job losses.

But Granovsky’s impact continues to be felt long after his death in 1995. Two years earlier, his lawyers at Goodman and Carr had crafted a so-called dual will that allowed his estate to avoid paying the 1.5% probate fees on a large portion of his estate — namely, his shares in Atlantic (worth $25 million) and one other private Ontario corporation, as well as the amounts owed to him from two firms.

Read: Estate freeze can enhance succession planning

His dual wills survived a 1998 Ontario Supreme Court challenge, and the resulting ruling has sharply altered estate planning ever since. Today, many Ontario estate planners and lawyers tell clients to consider drafting dual wills to reduce probate taxes in cases where the testator is bequeathing assets such as shares in private corporations. If those holdings are large enough, the savings will offset the additional legal fees associated with preparing a second will.

“It’s a pure tax savings,” says Jordan Atin, who is counsel at Hull & Hull LLP in Toronto and an adjunct professor at York University’s Osgoode Law School. The probate fees, adds Michael Segal, a partner with Chiarelli, Cramer, Witteveen in Ottawa, “can add up to a reasonable amount of money.”

Read: High-net-worth clients should draft dual wills

At current rates, Granovsky’s estate would have ended up paying almost $400,000 in probate fees for his holdings in Atlantic Packaging.

Free ride ending?

Yet the Ontario government this year moved to plug the loophole with new procedures and legislation that come into effect January 1, 2013. The law requires executors to obtain appraisals of property that is being conveyed but not disposed of, and there are tough penalties for falsifying the value of the estate.

Segal says he’s already cautioning his clients about the change of procedure, and telling them there may be implications for double wills. “There will likely be challenges once the law comes into effect,” he says, but they’re unknown as yet.

To date, the Granovsky precedent only applied in Ontario, so this approach hasn’t been available to most other Canadians. The exception is British Columbia, where some lawyers have found a way to avoid probate fees and restrictions in the province’s wills legislation.

Read: Shield your clients’ estates

Estate-planning experts also point out that individuals should consider multiple wills when they own assets in several jurisdictions, especially those with sharply different tax, probate and confidentiality requirements, such as the Bahamas or the Cayman Islands. (In some jurisdictions, for example, a marriage or a divorce automatically annuls previous wills, but those rules don’t necessarily apply in Canada.)

“It gives you more flexibility in how you want to deal with the assets,” observes Toronto lawyer N. Gregory McNally, who specializes in international tax strategies and asset protection planning.

Probate fees date back to 14^th-century England, as Granovsky’s lawyers explained during the 1998 trial. Probate courts, in turn, exist to assure family members, creditors and other parties, like banks, that a testator’s executors are acting on a final will. When a judge confirms the will, explains Segal, “there’s no possibility of someone coming along later and making a claim” against the estate.

Read: Transferring estate freeze assets

With the cash in a bank account, for instance, a probate court judge must oversee the estate’s dispersal of the funds, even if the deceased and a family member or spouse jointly held the account.

Yet in the case of real estate, notes Atin, there’s no such requirement. The reason: all property in Ontario is listed on the provincial land registry and is thus not subject to probate because there is no third party involved in the transfer.

Since Granovsky, the same rule applies to shares of a privately owned Ontario corporation or other personal effects — cars, jewelry, etc. With such holdings, legal and estate-planning experts advise clients to draw up a second will that lays out how these assets should be distributed. It does not need to be submitted to a probate court.

Read: How to use testamentary trusts

Segal, however, says while the two wills should be mirrors of one another, clients and their advisors must ensure assets only appear on one of the two wills. Otherwise, McNally says the wills could be challenged. Atin adds it’s important to have the same executor for both wills.

Courts in other provinces have swatted aside similar attempts by estates to avoid probate fees. In 1991, for example, a New Brunswick court blocked an application by an estate’s executors to split a will so probate fees didn’t apply to shares in a private company that were owned by the deceased.

Likewise, B.C. has no case law like Granovsky that allows dual wills. But some estate planners crafted dual wills for wealthy client, with the secondary will designed specifically for shares in private companies.

Barbara Janzen, associate counsel at Bull Housser & Tupper LLP, says it’s critical to ensure that the secondary will doesn’t revoke the primary will, which is submitted for probate. She also adds that there have to be two sets of executors. Still, Janzen points out, there’s a measure of legal risk. “You don’t have 100% certainty.”

Read: Get clients to make estate decisions

Consequently, not all B.C. estate lawyers do dual wills. “That’s not a very good basis to rely on when advising clients,” says Gordon MacRae, a principal with Legacy Tax and Trust in Vancouver. Instead, he uses alter-ego trusts, which hold a person’s assets but are not subject to probate fees.

MacRae points out that B.C.’s wills legislation is one of Canada’s strictest, and allows courts to make provisions for the spouse and children of the deceased even if the will doesn’t mention them. The alter-ego trust not only provides a way around probate fees; it also allows people to exclude beneficiaries — for instance, an estranged adult child.

Such approaches, however, remind us that legal conflict often occurs when someone dies and family members end up fighting over the estate’s disposal. A dual will may avoid probate fees in some cases, but this approach is hardly a silver bullet when it comes to estate disputes.

If conflicts arise, the second will can also be submitted to a probate court, Segal observes. But, he adds, “If you know there’s going to be an issue, deal with it when the person is alive rather than leave it to the courts.”