The importance of a Will—during the COVID-19 pandemic or anytime really—simply cannot be overstated. While there are a number of major implications associated with dying without a Will (intestacy), this article focuses on how one's estate is distributed under an intestacy and some resulting tax implications.
When an individual dies without a Will in Ontario, the rules of intestacy under the Succession Law Reform Act generally govern the distribution of the individual's assets.
More particularly, the intestacy distribution provides that:
- Where an individual is survived only by a spouse and no issue (children, grandchildren, etc.) - the spouse inherits everything;
- Where an individual is survived by a spouse and issue and the value of the estate is less than $200,000 - the spouse inherits everything;
- Where an individual is survived by a spouse and issue and the
value of the estate is greater than $200,000 - the spouse inherits
$200,000 and the remainder of the estate is divided between the
spouse and issue. The division of the remainder of the estate
varies depending on how many children (or predeceased children of
the deceased with surviving issue) there are.
Put simply, if there is one child, the spouse inherits $200,000 and the spouse and the child divide the remainder of the estate equally. If there is more than one child, the spouse inherits $200,000 and the spouse is entitled to one-third of the remainder of the estate, and the children divide the remaining two-thirds of the estate equally;
- If a child predeceases the individual leaving issue surviving him/her - such predeceased child's issue inherit in his or her place;
- Where there are no spouse and issue - parents inherit;
- Where there are no spouse, issue, and parents - brothers and sisters inherit;
- Where there are no spouse, issue, parents, brothers, and sisters - nephews and nieces inherit; and
- Where there are no spouse, issue, parents, brothers, sisters, nephews, and nieces - “next of kin” inherit.
When a person dies without a Will, only blood relatives, including children born outside of marriage, half-children, and, in some cases, posthumously conceived children, as well as legally adopted children can inherit. Step-children do not inherit under the rules of intestacy.
Contrary to the rules of intestacy, a Will provides individuals with the freedom to distribute their assets in accordance with their wishes. Where there is a surviving spouse and issue, under intestacy, there can be significant income tax implications, which can be avoided with a proper Will and estate planning.
From a tax perspective, an individual is—subject to certain exceptions—deemed to have disposed of his/her assets at fair market value upon death. Any inherent gains on such assets are subject to tax as a capital gain, which can be taxed at a rate in excess of 25% in Ontario in 2020.
The most common exception to this rule is when assets are transferred to a surviving spouse. The effect of such a transfer is that the capital gains owing upon the first spouse's death can be deferred until the later of the two spouse's deaths. This deferral can be significant where a surviving spouse survives the first-to-die spouse for a long period of time.
As discussed above, when an individual dies intestate and is survived by a spouse and children, his/her estate is divided between the spouse and children, depending on the number of children who survive the individual. If an individual died with $1 million and is survived by a spouse and more than one child, the surviving spouse would (subject to an equalization claim under the Family Law Act) receive $466,667 and the children would divide the balance, $533,333. Since there is no general exception for taxes owing upon death when a child inherits, capital gains taxes in excess of $130,000 could be prematurely owing upon the individual's death as a result of an intestacy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.