Capital Disbursement – Hull on Esate and Succession Planning #115
Listen to Capital Disbursement
This week on Hull on Estate and Succession Planning, Ian and Suzana follow up with their discussion on passing accounts. They focus on obstacles that often get in the way of smooth transactions particularly capital disbursement and encroaching on captial.
In response to the inquiries they received by email for more information on a precedent that people can look at, they suggest listeners go to the Hull and Hull News and Events section to look at their version of a white paper on this topic. You can link to it here.
Capital Disbursement – Hull on Estate and Succession Planning Podcast #115
Posted on June 3, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #115 of our podcast on Tuesday, June 3rd, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Ian Hull: Hi, Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you today?
Ian Hull: Just terrific, thanks. And I understand that we’ve been having a fair amount of activity on our e-mail and our phone-in and so we again remind people on the phone-in, please feel free to call in. Our number is 206-457-1985.
Suzana Popovic-Montag: And that number you’ll find if you need in the show notes, along with our e-mail address which is email@example.com, and, of course, you can feel free to visit our blog at estatelaw.hullandhull.com as well.
Ian Hull: Alright, before we get into the meat and potatoes of today’s podcast, I think Suzana, you had an interesting article that you saw and you thought you might have some comments on.
Suzana Popovic-Montag: Well there was a great article actually, Ian, in The Globe & Mail on Tuesday, May 27th, so that’s about two weeks ago now. And it was actually entitled, “Mean Girls, but with walkers”. And I just thought that it was a remarkable and refreshing kind of reminder of the fact that there is this circle of life. And what the article actually talks about is the fact that no matter how old you get, you know, you can still be dealing with the issues of what they call “social Siberia” where whether you’re young or you’re old, women can and have been known to treat one another badly. And here they just did an exposé of, you know, how people who are living in either retirement homes or nursing homes are experiencing these issues still to the very end.
Ian Hull: Well, it’s a really interesting dynamic and as the population ages in Canada, it’s another twist and turn that we want to keep our eyes open to. I’m going to be watching this series as it goes along. I don’t know how many part series The Globe & Mail is publishing, but this was Day Two of the series and I think it’s coming out every Tuesday. So we’ll look for it and see what else is going on with this tremendously important issue in Canada.
Okay, so thanks very much Suzana for bringing that to our attention. And why don’t we turn now to our continued search for the perfect set of accounts. And we have, working on our last podcast, a checklist of sorts that identifies the kind of buttons that will get pushed in some considerable detail if the accounts aren’t properly prepared. And we finished off the last podcast dealing with the question of original assets and capital receipts.
Suzana Popovic-Montag: And just to sort of carry on from that, Ian, when we’re looking at a set of accounts or preparing a set of accounts, one of the things that I like to remind people of is the fact that we want to make sure that if it’s a subsequent passing of accounts, that you’re picking up and sort of those last balances on those first set of accounts, so that there is this natural transition from this last to the next set of accounts, picking up all the unrealized assets, picking up the ending balances which become starting balances on the new set of accounts as well.
Ian Hull: And that really makes sense if you’re going to balance your chequebook, you want to make sure you know what you left off at before you want to start recalculating on a go forward basis. So it’s really no different than taking your personal finances for the period of say, a three month period, and then balancing your chequebook so to speak, checking off the cheques that come in and went out, and then you have a final amount that’s still left in your account. While you may wait another three months to update your chequing account and when you do that, you’ll want to go back to your starting balance, your beginning moment in time when you finished your last balancing, so to speak.
So it’s not, you know, really all that complicated, it’s just a task that some people overlook when they’re preparing the accounts and then they have difficulty reconciling the set of accounts from a historically, the previous set of accounts because they haven’t really thought about what was there to start with.
Suzana Popovic-Montag: That’s a great point, Ian. And the fact is, we want to make sure that we’re picking up all of the assets. Every original asset is either going to be somehow realized, it’s going to be written off or shown at the end of the accounting period as an unrealized asset to be dealt with during the subsequent period.
Ian Hull: And I remind people again that we have on our webpage, I think it’s the June 2005 Breakfast series, we have a precedent in the system that people can look at. I know that we had a couple of e-mails last week asking us specifically just to point them to it, and it’s easy to find, it’s in our media centre. So you can sort of, as you hear about these issues, you can see how they are set up in hard form, so to speak. It’s our version of a white paper.
Alright, so now, let’s talk about what is a general concept in passing of accounts that can be a little bit daunting as an issue of law, but more importantly, what does it mean in sort of simple terms. And that is the whole question of capital disbursements. And when I think of a capital disbursement, I think of it no different than when you have an investment, so to speak. Say you invested in a company and the tax laws in Canada are very straightforward. If you put capital in to the company, say you put after-tax dollars and invested into it, you are allowed to pull that capital out tax-free essentially. And with passing of accounts, it’s the same thing. They want to delineate or separate the income that’s coming in and out and they want to delineate and separate the capital that’s coming in and out. So you have the capital coming in. For example, you might have…an easy example might be the family home. And it comes in, in the form of cash or it comes in as the form of the house if you haven’t sold it. Now we have to start talking about how things get disbursed or sent out of the accounts into the hands of the beneficiaries or into the hands of creditors, depending on the situation, to pay bills and so on, and these are capital disbursements.
Suzana Popovic-Montag: And that’s all part of your chequebook analogy in that everything that’s paid out of the estate has to be recorded, including just starting at the very beginning with funeral expenses. And then any time that any other expenses are paid on behalf of the estate, that’s reflected in the accounts, as well as the purchase of any investments.
Ian Hull: So another identifiable capital disbursement is where legacies are paid out, typically within the year of the date of death or not. You have to consider whether or not it was paid and if there’s interest attracted to that legacy. And the rule there is not hard and fast, but it’s typically considered to be an executor’s year. So if you have a gift of $10,000 to my niece, Betty, you have typically, the Courts have said, you have a year to pay niece Betty. Now if it takes more than a year to pay niece Betty, sometimes niece Betty is entitled to ask for interest on that payment. So again, it’s a question of how you want to reflect that in the accounts as well. But if it’s a normal situation, where it’s paid within the year, then niece Betty typically does not get any interest on her $10,000 gift.
Suzana Popovic-Montag: And as part of reviewing a set of accounts, when you’re looking at the capital disbursements that are actually recorded by the executor, you’re checking for these kinds of things, whether or not in hindsight they’re reasonable and in proportion to the value of the estate. And when you’re dealing with distributions to the beneficiaries, again, you want to make sure that they’re in the correct amounts and that they’re paid out to the correct recipients pursuant to the terms of the Will or any subsequent Court Order that may have been made interpreting that Will.
Ian Hull: And this is a really good point because the distributions to the beneficiaries have to be done so carefully. I had a case within the last year where there was a lot of money distributed and the executor may be carelessly, but not carelessly but inadvertently, didn’t do the math and sent out it was split between six different beneficiaries but didn’t send out the distributions in one-sixth portions for a bunch of reasons. But the point was is that the beneficiary who didn’t get her sixth percentage of an interim distribution was frustrated by that. And I think it’s just a question of “do the math”. Carefully look at how many residual beneficiaries there are and make sure you do the apportionment without mistake.
Suzana, what is the other sort of area where, in terms of attracting attention on the distributions, that we find difficulties with beneficiaries?
Suzana Popovic-Montag: Well certainly Ian, in my experience, I find that when you’re dealing with encroachments on capital, that’s a big issue for a lot of different estates. And the main question there is, is such an encroachment on capital actually permitted by the terms of the Will? And then the second follow-up question to that, of course is, well was the encroachment a reasonable one, given the size of the estate, given the nature of the administration?
Ian Hull: So when you say encroachment on capital, let’s go back to our example where we have sent in a big chunk of money maybe from the sale proceeds of the house or we have the house itself in there and then it gets sold within the administration of the estate. When you say encroachment on capital, what does the executor have to think through in this issue and what does it mean by encroachment on capital?
Suzana Popovic-Montag: Well typically, Ian, we’re dealing with a situation where there’s a life interest in an estate and we’ve talked about these on previous podcasts where, for instance, a spouse passes away and leaves the surviving spouse with a life interest in the income of the estate, and then the right to encroach on capital, perhaps on certain conditions and perhaps, you know, an unbounded right to encroach on capital.
Ian Hull: So basically, it gives the right of the executor to look at the circumstances and notwithstanding the trust provisions that look like on the face of it everything goes to the surviving spouse in terms of income, the executor is given language in the Will that says “don’t forget you can top up a monthly payment to the income beneficiary by taking capital or encroaching on capital”. And the step of taking out of capital is a really important one and I think maybe in our next podcast, we’ll start off by talking a little bit about problems that arise when you get into situations where you need to encroach on capital and those kinds of considerations.
Suzana Popovic-Montag: Well, that’s great Ian. I think that will end up this podcast and I do look forward to our next one, where we can flush that issue out a little bit more.
Ian Hull: Well remember again, please feel free to call in. Our call in number, 206-457-1985.
Suzana Popovic-Montag: Or e-mail us at firstname.lastname@example.org or visit our blog at estatelaw.hullandhull.com.
Ian Hull: Thanks very much, Suzana.
Suzana Popovic-Montag: Thanks, Ian.
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