According to a 2007 Yahoo survey, the upcoming holiday season is a time when some people are twice as likely to consider breaking up with their significant other. This is partly because the individual may want to begin the new year with a fresh start.
An effective way of ensuring a fresh start after the end of a long-term relationship is to sign a separation agreement. A separation agreement allows parting spouses to contractually set out each party’s rights and obligations regarding issues with respect to property, debts and child and/or spousal support.
By the same token, a well drafted separation agreement can include provisions that allow former spouses to essentially contract out of any benefit conferred to them under each other’s Will. From an estates perspective, it may be useful for a separation agreement to include clear and unambiguous terms with respect to whether the surviving spouse:
- is entitled to take as a beneficiary upon death, whether by way of will, intestacy or beneficiary designation;
- has any rights to make a claim against the estate of the deceased spouse; and
- may act as the estate trustee or personal representative of the deceased spouse.
The decision in Makarchuk v. Makarchuk, 2011 ONSC 4633 is a great example of the importance of a well drafted separation agreement.
In Makarchuk v. Makarchuk, the spouses had been married for over 40 years. After separation, the couple entered into a separation agreement but they did not divorce. Five years later the husband died without changing his will, which named his former wife as the sole executor and beneficiary of his estate.
The separation agreement included the following provision:
“Except as provided in this agreement, and subject to any additional gifts from one of the parties to the other in any will validly made after the date of this agreement, the husband and wife each release all rights which he or she has or may acquire under the laws of any jurisdiction in the estate of the other and in particular:….”
Following the husband’s death, the wife sought directions from the Court as to whether, by virtue of the separation agreement, she had released her right to be the sole estate trustee and beneficiary of the estate.
The Court found that the wording contained in the separation agreement did not clearly address the terms of the deceased’s Will. In particular, the husband and wife only released all rights that they may acquire under the law. It was the Court’s view that such language was too broad to oust the wife from receiving her entitlement under the deceased’s Will.
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Dr. Donovan Waters, Q.C., recently published an insightful article, “Estate Planning When Authorising Trust Terms are Absent” (2016) 35(3) ETPJ 251, that examines whether it is a breach of trust to carry out an estate freeze that excludes or adds new beneficiaries.
An estate freeze fixes the value of a current trust (“Trust A”) and transfers the future growth to another trust (“Trust B”). Dr. Waters looks at whether Trust B can have different beneficiaries than Trust A. There are various reasons why trustees may want to change the beneficiaries of a trust – such as cross-border tax implications for Canadian citizens living in the US, a divorce or new marriage, to name a few.
However, given the nature of the fiduciary relationship between trustees and beneficiaries and given that a trustee is obligated to discharge the duties set out in the trust instrument, Dr. Waters is of the opinion that it is a breach of trust for trustees to exclude or add to existing beneficiaries by way of an estate freeze, unless authorised by the terms of the trust instrument. Trustees owe a duty to serve the best interests of the beneficiaries, and excluding a beneficiary from Trust B is antithetical to that beneficiary’s best interests.
Assuming authorising terms must be present in the trust instrument in order for trustees to perform an estate freeze, Dr. Waters’ asks what kind of language is sufficient to empower an estate freeze. He is of the opinion that the trust instrument must expressly (and not generally) authorise a freeze.
Assuming that Trust A is already in existence and provides no authorisation to vary or to carry out an estate freeze, Dr. Water’s is uncertain whether a court would grant a freeze, even if the relevant variation of trusts legislation provides the court with the jurisdiction to vary. While Canadian courts have taken a positive approach and facilitated variations when the variation is sought for the benefit of the beneficiaries, there is no benefit to the beneficiaries of Trust A who are excluded from Trust B. As such, for the beneficiaries of Trust A who are excluded, a court would likely require significantly more “benefit” than is granted by the variation sought by the trustees of Trust A.
Finally, Dr. Waters’ offers helpful advice for drafting new trusts that expressly authorise trustees to perform an estate freeze.
As the world continues to “shrink” as a result of globalization and as Canadian beneficiaries may be more likely than in past decades to take up domicile in another country, drafting solicitors should consult with their clients about what powers to grant to their trustees to adapt to a changing world.
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This week on Hull on Estates, Natalia Angelini and Doreen So discuss Deborah Petch’s paper, “Safe Practices: Reducing the ‘Risky Business’ Factor”, which was presented at The Six-Minute Estates Lawyer OBA conference on May 3, 2016”.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
Listen to Delay in the Granting of Probate.
This week on Hull on Estates, David and Sarah discuss issues that cause delay in the granting of probate.
While researching yesterday’s blog on the Brooke Astor estate, I stumbled upon a number of legal blogs on the Astor guardianship dispute. Several of these including this one noted that the lawyer for Astor had come under scrutiny during the guardianship dispute. The issue was whether the lawyer himself played a role in unduly influencing Astor to make a Will thereby benefitting her son’s charitable foundation. Such enquiry is, of course, of grave concern and considerably different than that faced by a lawyer who makes a Will in circumstances where there is some question as to whether the testator is capable to make a Will. Certainly, in Ontario, this latter issue has been exhaustively considered by the Court of Appeal in Bennett v. Hall. Put simply, if a lawyer is asked to make a Will (and has been retained for that purpose) but has questions as to the capacity of the testator, it is not inappropriate to make the Will and extensively document his file with notes so that the validity of the Will, if challenged, can be adjudicated by the Court. But what if the lawyer draws a Will under which he or she receives a benefit? A New York Probate lawyer, Philip M. Bernstein notes in his blog that Astor’s lawyer had "been named as beneficiary on several occasions and has inherited such valuable goodies as Manhatten apartments and valuable works of art including at least one Renoir and a Diego Rivera drawing as well as substantial sums of cash." While this example is clearly at the extreme end of the spectrum, trusts and estates practitioners may occasionally encounter clients who wish to name them as a beneficiary of their estate. To accept a retainer in such circumstances is to invite allegations of suspicious circumstances and a presumption of undue influence which could cause the entire Will to be set aside. Surely counsel of caution is to decline a retainer anytime a client wishes to confer a benefit in a Will upon the drafting solicitor, regardless of the circumstances.
Enjoy the weekend,
READ THE TRANSCRIBED PODCAST
During Hull on Estate and Succession Planning Episode #40, Ian and Suzana discussed issues surrounding the conclusion of the Family Conference, including tax matters, unapproving family members, implementing drafts and bullet-proofing your estate plan.