Use ‘Titanic clause’ to keep probate tax from swamping your estate

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If you’ve tried to book an appointment with your estate planner and been offered a date several months down the road, you already know that COVID-19 has caused a run on wills. Generally, that’s a good thing: Estate planning and preparing a will are not “set it and forget it” scenarios, especially for people of high net worth.

You probably know what to expect from the appointment. Your lawyer will draft a document that helps you plan for the usual — and unusual — circumstances. Some of the more extreme scenarios you’ll discuss may be routine for your estate planning professionals, but they might not be on your radar.

The Titanic clause, for instance. In Canada, the provision is usually called the simultaneous death clause, and although it’s extremely unlikely to happen in real life, it’s not unusual for a lawyer to ask you to consider what would happen with your estate — and your kids — should you and your spouse die at the same time.

Why the flashy name? It comes from the story of an elderly socialite couple who died together in that terrible maritime disaster. Ida Straus famously refused rescue and stayed aboard the sinking Titanic with her husband, Macy’s department store co-owner Isidor Straus.

Sometimes people will say: ‘We want my husband's sister to raise the children but she can't handle money.’

Estate lawyer Edward Olkovich

“Nobody wants to talk about estate planning, so you have to find ways of encouraging people to respond,” says Toronto-based estate lawyer Edward Olkovich, “So they come up with a phrase like ‘Titanic clause,’ which basically means that with anything in a will, you always have to consider the contingency and bring your estate planning down to the next level.”

Put bluntly, Olkovich says you need to consider this: “What happens if you leave everything to your spouse, and you and your husband don’t come back from Disneyland?”

Whatever you call it, without a “common disaster” clause in your estate planning, things could get messy, quickly, compounding what would be a terribly difficult situation with extra costs, added complexities and potential disputes.

Managing money, children

The really big questions involve children.

“If parents die, who’s the trustee? That’s the real problem,” says Olkovich. “Who’s going to manage the money for the children, and who will have decision-making responsibility?”

If both parents die and there is no trust set up for them, kids are able to access their inheritance after they turn 18. Then they can have it all. For families of great wealth, this is not usually the desired outcome.

“For high-net-worth people who may have substantial life insurance, you may be dealing with a multimillion dollar life insurance policy payable to a minor,” says Olkovich.

“If there is no trust set up for the minors, they inherit it from the government at the age of 18. They just walk over to the public guardian’s office and say, ‘Hey, I’m 18. My parents left me a couple of million bucks, give it to me.’”

Olkovich says people often postpone their planning because they can’t decide who should raise the children. He urges people to consult their lawyer — not a website — to review their options. He notes that you can appoint separate trustees for your children’s guardianship and their money oversight if you prefer.

“Sometimes people will say: ‘We want my husband’s sister to raise the children but she can’t handle money.’ So then you have to decide perhaps you want to split the responsibilities: one person has decision-making responsibility regarding the raising of the children or child, and somebody else is the trustee handling the child’s investments,” says Olkovich.

Wills that mirror each other

You can also hire a professional trustee to manage some or all of these situations. It’s an expensive but effective option.

Jag Gandhi, Gluskin Sheff’s Toronto-based vice-president of wealth planning, says another scenario to consider is when spouses have wills that mirror each other, which they commonly do, each leaving everything to the surviving spouse. If these wills also indicate a gift to a charity, for example, there is a risk that charitable gift may be given twice if spouses die simultaneously, unless you plan for that eventuality.

“You have to make sure the will is drafted carefully and contemplates simultaneous death,” says Gandhi. “Otherwise, his estate is going to pay a million dollars and her estate is going to pay a million dollars, when their intention was to leave a single gift of a million dollars.”

Oh, and what if you’ve named each other as executors? “Always name a backup beneficiary and executor in case your first choice is unable or unavailable,” says Olkovich.

Having two wills

Another estate planning option you may not know about is the option to draft a second will, which is very common among high-net-worth Canadians.

“In Ontario, when you’re dealing with multiple wills, you’re really dealing with questions about probate tax,” says Gandhi. Probate is a procedure to administer a deceased person’s affairs: to pay their bills and distribute what’s left as directed by law, or by a will.

“You’re going to have a will which we consider the primary will, or the public will, and assets that go through that will require probate. The secondary or private will is for assets for which probate is not required.”

Olkovich says secondary wills can include assets such as corporate shares, art collections, jewellery and other personal effects. These types of assets don’t require probate, but if they are included in the public will, they will have to be appraised and probate tax paid. (In Ontario that can mean paying $15 on every $1,000.) Having a secondary will can result in a quick, easy transfer of these types of assets and money saved.

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