Category: Joint Accounts
The laws relating to trusts are complex enough, before issues relating to family law are introduced. Even at the best of times, individuals establishing trusts need the advice and services of professionals to ensure that trust structures are sound and their trust goals are met.
But toss in marital discord or separation, and the picture can get murky.
In Ontario, and some other provinces, family law requires an equalization of net family property when a marriage ends. What would happen then if a spouse, perhaps knowing the marriage is on rocky ground, transfers some assets to an alter ego trust, with a child as beneficiary. The transfer to a trust has the effect of reducing the individual’s net family property.
The issue? If the exclusion of a trust asset is challenged, a court could examine the timing and intention in establishing the trust and include it in net family property because the establishment of the trust was a fraudulent conveyance, or intended to avoid an individual’s family law obligations.
Another complication relating to trusts and the calculation of net family property is valuing a spouse’s contingent or vested interest in a discretionary trust. Unless the interest is excluded (gifts or inheritances received during the marriage are excluded for example), interest in a trust forms part of net family property. How then do you value an interest when distributions from the trust are at the discretion of the trustee? Courts have taken different positions – a good overview of different valuation methods is provided here: http://cswan.com/valuing-interests-in-a-discretionary-family-trust/.
Estate freeze considerations
Other forms of estate planning that don’t necessarily involve a trust – such as an estate freeze – can also be impacted by family law. Because the law in many provinces excludes gifts from family property definitions, courts have ruled that shares received gratuitously as a gift through an estate freeze can be excluded from net family property. What’s not clear is whether shares purchased for a nominal amount would still be considered a gift (and excluded for family law purposes) or considered a purchase (which is not excluded).
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In Ontario, if two people die at the same time or in circumstances rendering it uncertain which of them survived the other, the property of each person shall be disposed of as if he or she had survived the other (see s. 55(1) of the SLRA). In short, each person’s Will is administered as if the spouse predeceased. This outcome can be particularly problematic in various circumstances, a few of which I touch upon below.
Spouses with mirror wills. Without a common disaster clause that would address circumstances where both spouses die simultaneously, there may be certain bequests that are triggered twice. For instance, mirror wills may provide that (i) the residue of the testator’s estate is to be transferred to the spouse if he/she survives the other by 30 days, and (ii) if the spouse predeceases or fails to survive the other by 30 days, a specific bequest is gifted to Child #1, with the residue going to Child #2. Since neither husband nor wife survived the other for30 days, Child #1 would get two specific bequests, one from each of the parents’ estates, reducing the entitlement of the residuary beneficiary, Child #2.
No alternate executor. Spouses often name the other as their executor. If no alternate is named and they die simultaneously, the executor appointment would go on an intestacy (see s. 29 of the Estates Act), and the testator has lost the power to control who administers the estate.
Joint assets. Where joint tenants die at the same time, unless a contrary intention appears, the joint tenants are deemed to have held the property in question as tenants in common (see s. 55(2) of the SLRA).
Insurance proceeds. If the insured and the beneficiary die at the same time, the proceeds of a policy are to be paid as if the beneficiary predeceased the insured (see SLRA s. 55(4), and Insurance Act ss. 215 and 319). If there is no alternate beneficiary, and unless the insurance contract provides otherwise, the proceeds would be payable to the estate and subject to probate fees.
These examples serve to illustrate the value in having simultaneous deaths form part of your checklist when advising estate-planning clients. For more on this topic, I encourage you to read this article and to watch/listen to my recent podcast with Rebecca Rauws.
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Other Articles You Might Be Interested In
Although probate fees in Ontario are relatively modest (approx. 1.5% of the estate value), most wish to avoid or reduce them.
With respect to which assets you must pay probate fees on, section 1 of the Estate Administration Tax Act, 1998 defines the “value of the estate” as “the value of…all the property that belonged to the deceased person at the time of his or her death less the actual value of any encumbrance on real property that is included in the property of the deceased person”. As joint-property vests in the co-owner of the property immediately before the time of death of their co-owner, the asset cannot be said to belong to the deceased person at the time of their death. An exception, of course, is the rebuttable presumption of resulting trust expounded in Pecore v Pecore.
Although parents may wish to place assets in joint-ownership with an adult child to avoid probate fees, here are five ways that doing so can have negative consequences:
- No savings – If the resulting trust presumption that property transferred into joint tenancy by a parent to the parent and his/her adult child results to the deceased parent’s estate is not rebutted by showing a clear intention of a gift, the transfer may not work to save on probate fees.
- Loss of control – The property cannot be sold or mortgaged without the child’s consent.
- Negative tax consequences – the transfer of an asset with accrued gains to someone other than a spouse is a deemed disposition at fair market value. Further, if the property is the parent’s principal residence, half of the principal residence exemption may be lost for the years following the transfer during which the child is not living in the property.
- Spousal claims – The property may be exposed to claims against the child by his/her separated spouse.
- Creditor claims – financial troubles and/or declarations of bankruptcy can result in the child’s interest in the property being subject to creditor claims.
These and other potential pitfalls are reviewed in a recent piece in The Lawyers Weekly.
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You may also be interested in the following blog-posts:
This week on Hull on Estates, Ian Hull and Lisa Haseley discuss the Mutual Wills Doctrine. Link to Paul Trudelle’s paper: Mutual Wills A Review http://bit.ly/2fs2l5P
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
Click here for more information on Lisa Haseley.
For my ‘Thursday Throwback’ post, I turn to an important 1981 decision from the High Court of Justice considering section 72 of the Ontario Succession Law Reform Act.
In Moores v. Hughes, an application was brought by a divorced wife for dependant support pursuant to Part V of the SLRA.
As a result of certain debts owing at the time of the Deceased’s passing, his net estate amounted to $40,000. However, as there were assets that passed outside of the Deceased’s Estate in the approximate amount of $365,000, comprised primarily of insurance policies, a joint bank account and a pension plan, a thorough analysis of section 72 of the SLRA, was undertaken. A helpful Hull & Hull LLP podcast on section 72 assets can be found here.
Often referred to as the ‘claw back’ provision, section 72 deems certain transactions to be included as testamentary dispositions as of the date of death and included in the value of an estate and available to be charged for payment for dependant support purposes. As the addition of section 72 had only recently been enacted, Justice Robins stated that the, “…section makes a significant change in the law as it stood before the enactment of the Succession Law Reform Act…Manifestly, the section was intended to ensure that the maintenance of a dependant is not jeopardized by arrangements made, intentionally or otherwise, by a person obligated to provide support in the eventuality of his death”.
Based on the Court’s interpretation of the (then) newly enacted section 72, the insurance policy, joint bank account, and pension plan, were all included in the estate and thus made available for dependant support.
Despite this interpretation, there remains estate planning techniques available to ensure that certain jointly held life insurance policies fall outside of the claw back provision of the SLRA, as addressed in the Ontario Court of Appeal decision in Madoire-Ogilvie (Litigation Guardian of) v. Ogilvie Estate.
This week on Hull on Estates, David Morgan Smith and Noah Weisberg discuss the responsibility for joint debt upon death of one of the debtors.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
Adult children of aging parents are often faced with important responsibilities. Ensuring that parents are adequately cared for is a task that many children lovingly undertake. As highlighted in this article in Forbes, key substitute decision planning ensures that the transition from independence to dependence, proceeds as smoothly as possible. Such steps should be taken immediately, and prior to the onset of dementia, or other incapacitating disorders, to ensure that one’s ability to provide instructions is unequivocal.
A power of attorney is a legal document that gives someone else the right to act on the grantor’s behalf. With the onset of incapacity, not only may the understanding of finances become increasingly difficult, but vulnerability to financial predators may increase. In fact, it is estimated that approximately 10% of the 1.5 million seniors in Ontario experience elder abuse. As such, allowing an incapacitated parent to maintain the authority to sign cheques and manage finances may be dangerous.
To preserve some degree of control, it is often the case that bank accounts are transferred into joint ownership between an adult child and their parent. This is a common practical step taken to ensure that the child who provides care to their parent has sufficient access to their parent’s funds to satisfy expenses arising. However, given the seminal decision in Pecore v. Pecore (SCC), at the time the bank account is transferred into joint ownership, careful notes must be taken to ensure that the evidence of testamentary intention regarding the account is clarified.
Meeting with an experienced lawyer that can explain the types of powers of attorneys, and the associated responsibilities, ensures the adult child has the appropriate powers to assist their parent. As well, the taking of detailed notes by a lawyer or financial institution is a prudent step to avoid possible estate disputes at a later date. While often we focus our efforts on estate planning, substitute decision planning is equally important.
When someone passes away, their executor is responsible for paying out of the estate any debts and liabilities for which the deceased was responsible. However, when there is debt for which two or more people are jointly liable, who becomes responsible when one of the joint debtors dies?
In the case of a joint debt, presumably all joint debtors will have taken responsibility and signed for that debt. Accordingly, when one joint debtor dies, the other joint debtors will be responsible for the full amount of the debt.
This obligation to pay the full amount of a joint debt is between the debtor(s) and the creditor. The creditor can thus seek repayment from either joint debt holder, or, after the death of one joint debtor, from the surviving debtors. As between the debtors themselves, however, there may be remedies for a situation in which one joint debtor is made to pay the full debt, without contribution from the other joint debtor. This may arise upon the death of one of the joint debtors if the Estate refuses to pay back any of the debt.
The courts have held that if liability for joint debt is shared, but only one debtor is ultimately made to pay the full amount of the debt, there may be an equitable remedy available. In Parrott-Ericson v Stockwell, 2006 BCSC 1409, the court stated that, even if there is no specific arrangement between the estate and the survivor who becomes responsible for a joint debt, “equity will impose that obligation in order to avoid unjust enrichment. That is the usual rule, because ordinarily there is unjust enrichment if the liability is not shared.”
In that particular case, unjust enrichment was not found. The joint debt in question was a line of credit secured against two properties owned jointly by the Deceased and his surviving spouse. The line of credit had been used to acquire the properties. Upon the death of the Deceased, the spouse took sole title to the properties by right of survivorship, and she also became liable for the balance of the line of credit. The court held that, although normally the estate would be unjustly enriched in this situation, as the spouse was receiving the entire benefit of the properties, it was not unjust that she be responsible for the full amount of the loan relating to that property.
Ultimately, the answer to this question may not be completely straightforward. Ensure that responsibility for joint debt is clear as between any joint debtors to ensure that you are not liable to pay the full amount of a joint debt after someone’s death, and that you have recourse to claim contribution from the deceased’s estate if necessary.
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In a recent judgment, the Ontario Superior Court of Justice considered whether joint account holders owe a fiduciary duty with respect to the management and operation of a joint account.
The facts of MacKay Estate v MacKay, 2015 ONSC 7429 are not unusual. Dawn MacKay (“Dawn”) was married to Tom MacKay (“Tom”) one of Annie MacKay’s (“Annie”) three sons. Annie and Dawn had a very close relationship. In early 1999, Annie made a Power of Attorney for Property in favour of Tom. Shortly thereafter, Annie, with Tom’s assistance, named Dawn as joint bank account holder. At trial, Dawn advised that she and Annie had agreed that Dawn would assist Annie with her banking and her care, as well as provide companionship, in exchange for compensation. There were no specific terms agreed to at the time.
Around 2003, Dawn began making transfers from the joint account to herself. She stated that the transfers were in the nature of compensation and were loosely based around payment of $250.00 per week for services provided. After Dawn and Tom separated in 2008, Tom commenced an action as Annie’s litigation guardian seeking an accounting, payment of monies found due, damages for breach of trust, and punitive damages. After Annie died in 2010, in 2012, Tom, as Estate Trustee, continued the action on behalf of Annie’s estate.
The main issues considered by the court were (1) whether Dawn, as a joint account holder, owed a fiduciary duty to Annie in the management and operation of the joint bank account; (2) whether Dawn breached her fiduciary duty by making payments to herself from the account; and (3) whether Dawn was liable to repay the amount of the payments made.
To determine whether there was a fiduciary relationship, the court followed the guide from Frame v Smith,  2 SCR 99, to consider whether:
i. the fiduciary has scope for the exercise of some discretion or power;
ii. the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and
iii. the beneficiary is vulnerable to or at the mercy of the fiduciary holding the discretion or power.
Based on these indicia, the court found that Dawn did owe a fiduciary duty to Annie and that Dawn had acted as a trustee de son tort. The court also found that in making the payments to herself out of the joint bank account, Dawn had not breached her fiduciary duty and that, in fact, the payments were reasonable in the circumstances.
Although this case seems to establish that it is possible for a joint bank account holder to owe a fiduciary duty, it is not entirely clear from the decision whether this finding will apply only in the context of a non-contributing individual who is added to a pre-existing account in order to assist the account holder, or whether this may apply to all those who hold bank accounts jointly.
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Many of us that toil away in the world of estates become used to thinking of trusts doctrine within that very refined context. Obviously there are other contexts, and intersection between them and the world of estates. An example is the law of resulting trusts. We most often consider resulting trusts in terms of jointly held assets and the type of situation in Pecore v. Pecore, 2007 SCC 17 (S.C.C.). As we are all know, a gratuitous transfer calls for an explanation and where there is none forthcoming, an asset may presumptively be held on resulting trust for the transferor or her estate. Where a gift was intended, beneficial title may follow legal title and the transferee may retain the asset.
Another variation on this theme is where the transfer is not made gratuitously, but there was an intention for the transferor (e.g. parent) and transferee (e.g. child) to share title where there is the acquisition of an asset. We call this a ‘purchase money resulting trust’ – the transferor has an equity in the thing acquired which cannot be denied by the transferee. The leading case is Nishi v. Rascal Trucking Ltd., 2013 SCC 33 where Justice Rothstein explained the doctrine:
“A purchase money resulting trust arises when a person advances to funds to contribute to the price of property, but does not take legal title to that property. Where the person advancing the funds is unrelated to the person taking title, the law presumes that the parties intended for the person who advanced the funds to hold a beneficial interest in the property in proportion to that person’s contribution. This is called the presumption of resulting trust.”
A nice discussion of the relationship of these principles in the testamentary context can be found in a B.C. case, Frame v. Rai Estate, 2012 BCSC 1876, which was an Estate dispute involving rights in an asset that a number of family members bought together although title was held by only one person. The lesson for us is to follow the beneficial interest in property inter vivos, and consider whether there was a valid and complete disposition before death. It may be that the Estate has an equity in all, or part, of the property that remains after death.