Keeping Your Spouse Informed: Estate Freezes
“Happy wife; happy life” is an adage that we are all familiar with.
I recently came across a decision of the Manitoba Supreme Court that I thought was worthy as an adage for estates and trusts practitioners. What caught my eye was the way Justice Allen opened his reasons for the decision in Hamm v. Hamm (Estate of), 2014 MBQB 14:
“It is a very risky business for a farmer or business owner to undertake an estate freeze without informing his or her spouse of the plan and indeed, without arranging for independent legal advice to have the ramifications of the freeze explained. It is even riskier to divest oneself of the shares and shareholder loan received from that estate freeze, again without informing one’s spouse.”
The couple, in this case, were married for 41 years when the husband died. The husband was a widower with two sons and a daughter from his first marriage. The couple later had a daughter of their own. The couple and their children lived a typical farm life. In the late 90’s, the husband decided to pass the farm operation to his sons. This was done by way of an estate freeze. The sons were a part of some of the husband’s meetings with his lawyers and accountants, while his wife and daughters were not involved at all.
A NewCo was created in the course of the estate freeze. Over time, the husband’s land, machinery, and farm equipment were transferred into NewCo in exchange for preference shares and shareholder loans from NewCo. The husband also made a new Will that gave his interest in the NewCo to his sons. The husband did not tell his wife about this either and she only found out when he died.
On death, the wife elected for equalization of assets under the Manitoba Family Property Act and she claimed that the value of the husband’s farm assets, notwithstanding the estate freeze, ought to be included in their family property for equalization purposes.
The wife won. Justice Allen was not sympathetic to the Estate’s arguments that she ought to have known about the estate freeze, and made her claims earlier, by investigating further when she was told that NewCo was created for “tax purposes”. This was particularly so because the husband continued to run the farm operations as if nothing had happened.
This case is a straightforward example of how testamentary intentions can be thwarted when a spouse is kept in the dark. It is good practice for lawyers to advise their clients that their spouse should be informed and that their understanding should be documented with independent legal advice. In explaining why a spouse should know about an estate freeze, and the pitfalls of telling one’s spouse, this exercise will have the benefit of emphasizing to the client what he/she is truly giving up and bring “home” the realities of this rather legally complicated transaction.
Thanks for reading!