Author: Ian Hull
The amendments to the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (the “I.T.A.”) have eliminated graduated rate taxation for testamentary trusts, which were previously taxed at rates applicable to individuals. Starting next year, testamentary trusts will be taxed at the highest marginal rate of taxation, subject to a couple of exceptions, one of which applies to a testamentary trust that can be considered a Graduated Rate Estate (GRE). The purpose of these amendments is to try to eliminate unequal treatment of testamentary trusts as compared to inter vivos trusts, which are taxed at the highest marginal tax rate, while testamentary trusts have enjoyed graduated rates for decades.
Starting December 31, 2015, the I.T.A. s. 248(1) will contain a definition for a GRE. In order to qualify as a GRE and benefit from graduated rates of taxation, no more than 36 months can have passed after the death of the testator whose estate established the trust, it must designate itself as a GRE, and only one GRE can be designated per individual. Going forward, as noted in this article from a national law firm, only GREs may benefit from graduated tax rates, use certain loss carry-back provisions, and have a non-calendar year end.
Another exception to the elimination of graduated rates of taxation applies to a qualified disability trust. The I.T.A. s. 122(3) states that in order to be a qualified disability trust, it must: (i) be a testamentary trust; (ii) the beneficiaries of the trust must have made a joint election with the trust for the trust to be a qualified disability trust, and (iii) s. 118.3(1)(a) to (b) must apply to such beneficiaries.
There have also been changes to treatment of charitable donations made in a Will. Whereas, in the past, a charitable gift was considered to be made immediately preceding the death of the testator, the new rules provide that the gift is made at the time it is actually transferred to the donee. The value of the property will also be determined on this basis. The amount of the charitable donation can then be allocated between the deceased or the GRE, as per I.T.A. s. 118.1(1), as long as the Estate can be considered a GRE at the time. The amount of the gift can be deducted by the deceased in the year the donation was made or used in the preceding taxation year. Alternatively, the gift can be deducted by the GRE in the year of the donation, carried forward, or carried back for up to the 36 months that a GRE may exist as such.
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Last week, Suzana’s blog post discussed longevity planning and Powers of Attorney for Personal Care (POA PC). She mentioned that, while financial and estate plans tend to focus on assets, a longevity plan or a POA PC is important in order to address other issues such as quality of life planning and health care instructions. Long-term care insurance is one instance where these plans overlap.
As life expectancy increases, planning for retirement becomes more important. The possibility that you may have health care or long-term care expenses later in life is becoming increasingly likely. Long-term care could include in-home care or moving into a long-term care facility, both of which come with high costs.
As one article, Do you need long-term care insurance?, posted on MoneySense.ca points out, long-term care insurance is more common in the U.S. than in Canada. However, although some costs for long-term care may be publicly funded in Canada, most such expenses will need to be paid for by the individual. Thus, there are several options to choose from when considering how to fund long-term care:
- Save for retirement in amounts sufficient to cover any expenses which may arise;
- Rely on your children or other family members to contribute financially; or
- Purchase long-term care insurance
To illustrate the importance of thinking about how to fund possible long-term care, consider the example of a couple, one of whom becomes ill and requires long-term care in a facility. After funding this care, the other partner may be left with very few financial resources to pay for their own retirement or long-term care costs further down the road.
However, if you wait too long to purchase long-term care insurance, the premiums may be more expensive than you would like and could turn insurance into a non-viable option. This leads us back to the importance of planning. Whether you decide to purchase insurance, or save to cover any eventual expenses yourself, it is vital to plan ahead and keep in mind that the amount you may require during retirement may be greater than you expect, especially if you or your partner end up requiring care later in life.
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Being an executor is a lot of work and a job that can be trying at times, particularly where disputes arise among the beneficiaries and/or the deceased’s family members in relation to the assets of the estate.
If you are appointed an executor and you do not wish to act, you may execute a Form 74.11 “deed of renunciation” through which you may effectively give up the rights and responsibilities that come along with the role. This form of renunciation, however, is generally only available before any steps have been taken by the executor to administer the estate or apply for probate. A named executor, who has taken active steps to administer an estate and/or apply for probate will, in most cases, be required to apply to the Court to be removed. Upon such application, the Court may order that he or she complete the job.
This is precisely what occurred in the recent case, Dueck v. Chaplin. The facts of that case are as follows:
Prior to his death, the deceased executed a Last Will and Testament that named his solicitor and his sister as the executors of his estate, and his children and his sister’s children as the beneficiaries of his estate.
The deceased had executed a prior Will many years earlier, in which he had named his wife as both the executor and sole residuary beneficiary of his estate.
At the time of his death the deceased was estranged from but still legally married to his wife, with whom he had been in the midst of contentious litigation regarding the division of their assets and custody of their children.
Following the deceased’s death, the deceased’s solicitor and the deceased’s sister, being the executors named under the deceased’s Last Will, began the process of gathering the deceased’s assets and paying the deceased’s outstanding liabilities. They also filed an Application for probate.
The deceased’s wife subsequently filed a Notice of Objection challenging the validity of the deceased’s Last Will.
Both the deceased’s solicitor and the deceased’s sister sought to renounce from their role of executor on the basis that they were conflicted given their involvement in the drafting and execution of the deceased’s Last Will. (The deceased’s solicitor had met with the deceased and had drafted the deceased’s Last Will, and the deceased’s sister had accompanied the deceased to his various meetings with the solicitor.)
Upon hearing the case, the Honorable Justice Goodman referred to paragraph 66 of the decision of the Ontario Court of Appeal in the Estate of Herbert Washington Chambers, deceased, 2013 ONCA 511 in which Justice Gillese stated:
Renunciation is generally not available if a party has already “intermeddled” with the estate. Intermeddling is the term used to describe the acts of a person who deals with an estate without having been formally recognized as the estate trustee. As Kennedy J. explained, “while executors may renounce at any time, (a right which is usually exercised before applying to probate) the courts have been reluctant to allow an executor to renounce after having intermeddled in the estate, or after having applied for probate”: Stordy v. McGregor (1986), 42 Man. R. (2d) 237 (Q.B.), at para. 9. Even a slight act of intermeddling with a deceased’s assets may preclude an executor from afterwards renouncing: see Cummins v. Cummins (1845), 8 I. Eq. R. 723 (Ch.), at pp. 737-38.
Following this precedent, Justice Goodman found that the executors’ intermeddling precluded them from renouncing, and that they were in fact the most appropriate individuals to propound the Last Will given their involvement in the drafting and execution of the testamentary document.
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Ian Hull and Laura Betts
When an individual dies, his or her last will and testament must be located. Generally, the original, and not a copy, will be required to legally administer the estate.
The court will require the original to grant probate, and many institutions and individuals holding and/or dealing with estate assets often require probate prior to releasing any funds to beneficiaries.
Sometimes however, after a diligent search for the last will, only a photocopy of the original can be found. In such circumstances, the named estate trustee and/or beneficiaries will be required to make an application to the court to “prove” the lost will before the deceased’s estate may be administered.
Where a will can be traced into the possession of the deceased but cannot be located on his or her death, there is a legal presumption (the presumption of “animo revocandi”) that the deceased destroyed the will with the intent of revoking it (see Lefebvre v. Major,  S.C.R. 252 (S.C.C.) and Sorkos v. Cowderoy (2006), E.T.R. (3d) 108 (Ont. C.A.) (“Sorkos v. Cowderoy”).
The Ontario Court of Appeal’s decision in Sorkos v. Cowderoy, outlines the legal test for determining whether a lost will can be proven. Specifically, a party wishing to prove the lost will must:
- Establish due execution of the will;
- Trace possession of the will to the testator’s date of death (and subsequently, if the will was lost after death);
- Rebut the presumption that the testator destroyed the will with the intention of revoking it; and
- Prove the contents of the lost will.
In Ontario, rule 75 and rule 76 of the Rules of Civil Procedure set out the process to be followed when proving a lost will.
If all persons who have an interest in the estate consent to the will being proven in court, the process is relatively straightforward. Affidavit evidence may be filed along with the application, and the court may declare the Will to be valid based solely on the affidavit evidence, which satisfies the four elements above.
In situations where one or more individuals with a financial interest in the estate do not consent to the will being proven the process is more arduous. The estate trustee and/or the beneficiaries will be required to commence a court proceeding in order to obtain the advice and direction of the court with respect to the contested issues.
As such, it is important to ensure that the original copy of your will is kept in a safe place and that your estate trustee and/or beneficiaries know where it can be located on your passing. Doing so will reduce the likelihood of headaches for your loved ones and delays to the administration of your estate.
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Much of the estate planning process involves minimizing taxes that might otherwise be due and payable from one’s estate upon death. On occasion, however, the end goal of attaining large tax savings has been known to entice people to bend the rules a bit too far.
A recent article written by Ben Steverman titled “The Estate Tax Dodge That Went Too Far” highlights one such example.
The article involves the estate of Julius Schaller, a wealthy businessman who once owned a grocery business in Philadelphia called J. Schaller & Co. Steverman describes that when Schaller died in 2003, his executors set up a $2.6 million dollar scholarship fund called the “Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc.” The $2.6 million dollar donation provided enough of a deduction to reduce Schaller’s estate’s tax bill to zero.
A year after Schaller’s death, the foundation awarded its first two scholarships – one to Schaller’s niece and one to Schaller’s nephew. Each of the niece and nephew got another set of scholarships the next year, as did another Schaller relative.
Steverman describes how the IRS cried foul and litigation that subsequently ensued. The foundation’s lawyers argued that the scholarship was technically open to all eligible descendants of Hungarian immigrants; however, the foundation never followed through on promises to advertise the scholarship in newspapers. While the foundation did send information to Scholarships.com and Fastweb.com in 2007, this was only after the IRS had commenced a formal audit.
On July 1, U.S. District Judge Reggie B. Walton ruled the foundation wasn’t a legitimate tax break. He held that “[t]he Foundation’s activities contravened the law in such a blatant and egregious manner that the Court could not come to any other conclusion.”
There are many ways to minimize estate taxes in Canada, several of which we have outlined in a previous blog post which can be viewed here. Setting up a foundation, a charity or a scholarship fund can certainly minimize estate taxes if properly structured and carried out.
It is important to remember that executors can be found personally liable for losses they cause the estate. As such, if you’re acting as an executor it is important that you seek proper guidance from knowledgeable professionals when making investment decisions or contemplating tax minimization strategies. As illustrated above, tax minimization can quickly become tax avoidance if not properly structured or carried out!
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Testamentary Freedom—the ability to leave one’s property to whomever one wishes—is a principle long held in the common law of Canada. But as evidenced by legislative reforms and recent jurisprudence, testamentary freedom is not absolute and will likely continue to encounter challenges as society and the law develop. Strangely enough though, current challenges to testamentary freedom are not altogether different from the sorts of considerations that go into other well-established will challenges.
One well-established basis for challenging a will is called testamentary capacity. In my book, Challenging the Validity of Wills, I define testamentary capacity as the ability of the testator “to know and understand that one is executing a testamentary document disposing of assets, the general value and nature of which are known to the testator or testatrix, after having considered all persons having a moral claim to the assets being disposed of” (at p. 19).
The leading case on the law of testamentary capacity, Banks v Goodfellow (1870), L.R. 5 Q.B. 549, though nearly 150 years old, offers an insightful look at one rationale for testamentary freedom. The court says, “The instincts, affections, and common sentiments of [hu]mankind may be safely trusted to secure on the whole a better disposition of the property of the dead, and one more accurately adjusted to the requirements of each particular case than could be obtained through a distribution prescribed by the stereotyped and inflexible rules of a general law” (at p. 817).
The rule of testamentary freedom is “founded on the assumption that a rational disposition”—or a disposition based on the rational choices of the testator—is better than one imposed by law (at p. 817).
However, in order to make rational choices, the testator must be of a sound mind. That is, they must have capacity to make a will. The reason a sound mind is so important, says the court in Banks v Goodfellow, is because of the moral responsibilities people have to others. The court reasons that if the law [as it was then] permits people the freedom to do what they want with their property, then courts must make sure that testators have testamentary capacity because “a moral responsibility of no ordinary importance attaches to the exercise of” testamentary freedom (at p. 817).
In other words, with great freedom comes great responsibility.
Testamentary capacity was a means to ensure that people were capable of carrying out their freedom responsibly. Failure to fulfill one’s moral responsibilities (such as, provision for a spouse or a next of kin) was one factor that aroused the suspicion of the court, and when issuing decisions, it was a key consideration in a court’s assessment of the testator’s capacity.
The point is: courts have long recognized that moral responsibilities attach to testamentary freedom. In 1870, testators were absolutely entrusted by the law to fulfill their moral responsibilities. However, that not always being the case, succession law has developed to ensure some of those moral obligations are met (for example, one’s moral obligations to one’s spouse or to a dependent). It may be possible to describe developments in succession law as giving greater affirmation to our individual and collective moral responsibilities. As such, one might ask whether the future of succession law will continue to develop along those lines, namely, giving new definition to what constitutes a moral obligation in the twenty-first century.
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As you may have noticed, our blog has undergone a content freeze over the past two weeks. This was done to facilitate an overhaul of our website. The purpose of the update was to make a mobile-friendly site that meets accessibility standards as prescribed by the Accessibility for Ontarians with Disabilities Act.
Here are some of the changes you may notice. First, as a mobile-friendly site, we have incorporated a responsive design that automatically resizes content depending on the size of your screen. One person estimates that somewhere between 20 to 40 percent of online traffic to law firm websites comes via mobile searches. That number is expected to rise. Given our commitment to delivering high quality content, we also wanted a website that was easy to access, anywhere at any time.
Second, archived on our site is nearly 10 years of material touching on matters of estate and trust law. These include blogs, podcasts, videos and our newsletters (The Probater). The updated site makes finding content easier because the navigation structure is simpler. All of our content has been stored under “Resources.” As such, you are just one-click away from accessing the plethora of information available to you. All of this, we hope, makes your browsing experience simpler and more efficient.
As part of our commitment to delivering the best results for our clients, we hope that our new site delivers the best results for our friends who read this blog and those who frequent our website. We look forward to continuing the conversation regarding estate and trust matters and to serving you however we can.
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Trusts offer a number of advantages in the estate-planning context, from deferring taxes, to sheltering assets from creditors. As a result, trusts are being used with ever increasing frequency as an estate-planning tool. Many clients, however, do not necessarily understand or appreciate the proper purpose for the trust vehicle or the restrictions that will apply to their management of the trust assets. It is important for those contemplating the use of a trust to understand that, if not properly constituted or carried out, the trust they create may be deemed void, and the intended advantages lost.
In order to create a valid inter vivos trust, there must be three certainties: a certainty of intention, a certainty of subject matter, and a certainty of objects. In other words, the person setting up the trust (the settlor) must intend to divest him or herself of ownership of certain assets, and intend those assets to be held by the appointed trustee(s) for identified beneficiaries. As such, it is important to understand that once the settlor transfers the assets to the trust, he or she neither owns or controls them. The assets will be held for the benefit of the beneficiaries in accordance with the terms of the trust and will be controlled by the appointed trustee(s).
Many clients establishing trusts, however, wish to retain control over assets by:
- being appointed the sole trustee,
- retaining veto power over any other appointed trustees, or
- appointing a compliant trustee(s).
These types of arrangements should be treated with caution, as there is a high likelihood they will result in the trust arrangement being deemed a “sham” and void as a result. If deemed void, the trust is treated as though it never existed in the first place, and as a result, any advantages for which the trust was created, such as tax avoidance or protection from creditors, will be lost.
In other words, a sham trust is one in which the settlor does not truly intend to dispose of the assets settled on the trust, but rather, merely wishes to create the impression that the assets have been disposed of, while in reality maintaining control of them throughout.
If a trust is challenged as a sham, the settlor and trustee(s) will be unable to rely solely on the wording of the trust agreement in order to illustrate their requisite certainty of intention. The court is authorized to look further to the conduct of the settlor and trustee in setting up and managing the trust to determine whether the trust was validly constituted. If it can be shown that the settlor and trustee(s) intended to deceive or misrepresent the actual transaction from the outset, that trust will be deemed a sham and will be void as a result.
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The Earl of Spencer (the late Princess Diana’s brother) recently sparked controversy when he announced his intention to leave his 90-room stately home, Althorp, to his son, Louis. Louis is the Earl’s only son, however, he is the youngest and but one of the Earl’s four children.
In leaving Althorp to his only male heir, the Earl of Spencer is keeping with the British tradition of primogeniture, being the practice of leaving one’s real property to the eldest male heir.
Historically, the principle of primogeniture was introduced to prevent the subdivision of large family estates and to reduce the sale of properties, for example, where two children inherited the family home but one child was unable to financially buy out the other child’s share. This ensured that large estates remained intact and within the family. Recently, however, the subject has become quite a controversial issue in Great Britain.¸More and more, aristocratic women are protesting the principle’s application, arguing that they are no less capable of managing the family’s fortune than their younger brothers.
Indeed, the royal succession rules were recently changed by the Succession to the Crown Act, 2013, which was passed by the Parliament of the United Kingdom. This act replaced male preference primogeniture with absolutely primogeniture for those born in the line of succession after 28 October 2011. This means that the eldest child, regardless of gender, will now precede his or her siblings to inherit the crown.
However, the principle of primogeniture still carries weight in relation to real property in the United Kingdom. As such, given the Earl’s announcement, it would appear that Louis’ older sisters, Lady Kitty, Lady Eliza and Lady Amelia, will miss out on inheriting the family estate.
In Canada, the principle of primogeniture was abolished by the 1852 Act of 14-15 Victoria, c. 6; (C.S.U.C., c. 82) commonly known as the Act Abolishing Primogeniture (the “Act”). Initially there was some confusion as to whether that Act applied only to determine who the heirs were upon an intestacy or whether it applied also to determine who the heirs were in the case of a testamentary devise to “heirs” (see Tylee v. Deal (1873), 19 Gr. 601). It was concluded, however, that the principle of primogeniture was abolished with respect to testamentary devises as well. As such, in Canada, “heirs” when used by a testator in his or her Will no longer refers only to the eldest son but to his brothers and sisters as well (see Baldwin v. Kingstone (1890), 18 O.A.R. 63).
Accordingly, no matter where the testator lived prior to death, if he or she leaves behind any real property (land and buildings) located in Ontario, that property will be subject to Canadian law and, in Ontario, the provisions of the Succession Law Reform Act. As it stands, this legislation does not expressly support the preference of one’s male heir over his or her female heirs.
While a testator does have testamentary freedom to leave property to a male heir by the terms of his or her Will, the Court does have discretion to alter the terms a Will where it does not make adequate provision for the testator’s spouse and/or dependants.
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I recently came across an article titled TFSA Designations May Cause Estate Planning Problems written by Amin Mawani and published by Advisor.ca. The article highlights some important estate planning considerations for TFSA account holders.
In its April 2015 Budget, the Federal Government proposed raising the annual TFSA contribution limit from $5,500.00 to $10,000.00, and raising the cumulative TFSA contribution limit to $41,000.00. For many, these accounts have already become a substantial personal asset. This increased contribution room only increases the likelihood that these accounts will continue to grow into substantial estate assets for those who have and continue to contribute to them.
Without proper planning (i.e. without making the proper designations), one’s TFSA will revert to his or her estate on death, resulting in the unfortunate consequence of the account losing its tax-sheltered status, and rendering the funds subject to Ontario’s hefty probate fees.
Mawani’s article assists account holders by highlighting the various designation options available and by distinguishing between a designated successor-holder and a designated beneficiary. Mawani explains that an account holder may designate his or her spouse or common-law partner as a successor-holder and anyone else as a beneficiary. A successor-holder will trump a beneficiary if both are alive at the time of the original account holder’s death, and a beneficiary will trump the deceased’s estate if no successor-holder was nominated or if the successor-holder predeceases the account holder. If neither a successor-holder or a beneficiary are designated or alive at the account holder’s time of death, the account proceeds will then revert to the deceased’s estate.
Mawani goes on to explain the benefits of making such designations, including the fact that if such designations are made the account holder’s TFSA will not de-registered on death. The assets will remain continuously sheltered, and the successor-holder may make tax-free withdrawals after taking over ownership. In addition, he explains that the successor-holder can continue to have her or her own TFSA, with lifetime and annual contribution limits unaffected, or alternatively may choose to consolidate the deceased’s account into his or her own.
Finally, Mawani helpfully provides links to the designation forms for various Canadian institutions including BMO, Investors, RBC, Scotia and TD. The article is worth a read for anyone who currently contributing or planning to contribute to a TFSA.
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