Tag: gift over
There are some important milestones in life when it is imperative for a person to update their will. A later-in-life second marriage certainly is one of them.
If your first marriage ended in divorce, the provisions in your will that refer to your spouse are automatically revoked, as provided by s. 17(2) of the Succession Law Reform Act. Your former spouse will no longer be your executor or trustee or even a beneficiary of your estate unless there is an explicit reference in your will to this.
Keep in mind the same is not true for beneficiary designations relating to assets, such as RRSPs, RRIFs, life insurance policies and pensions. Those will still flow to the individual named in those plans unless you take steps to name new beneficiaries.
If you are separated but not divorced, your will remains entirely valid upon death, in the absence of a separation agreement delineating a married spouse’s entitlement. Therefore, any bequests previously made by a spouse to a surviving spouse remain valid. This situation is not ideal either, since you want to avoid having assets flowing to a person when you are no longer involved with them.
A complicating factor with later-in-life marriages is that they can bring together children from previous relationships. From an estate-planning perspective, this can create complexities.
Perhaps the children from a first relationship resent a step-parent and feel that their step-siblings are now unfairly in line for the estate. Conversely, a step-parent may welcome a spouse’s child as their own or the couple may have a child of their own or adopt one. Where does that leave the other children from previous marriages from an estate distribution perspective?
Aside from the financial implications of having your family members squabble over your estate, there is an emotional component to consider. Children may feel slighted if they do not inherit what they consider to be their fair portion of the estate, even if the intention is that the surviving spouse, in turn, leaves assets to the children upon their death. This approach leaves room for uncertainty, which is the last thing you want to create when drawing up an estate plan.
A common practice for estate planning when it comes to second marriages is to provide a “life estate” to the surviving spouse and a “gift over” to the testator’s children. If the father were to die in this scenario, the matrimonial home and all of his money would be held in trust for his widow for life. She could then make use of these assets but would not have the right to gift them to beneficiaries of her own estate, as the assets would be given to his children upon her death.
Almost any blended-family situation creates tension that can explode into estate litigation if the will is not carefully drafted to address the family’s circumstances. It is important to be clear about your wishes with the lawyer revising your estate plan, taking into account how everyone in your blended family will react to the arrangement.
To sum up, it is crucial to seek the advice of legal counsel about wills before entering into a late-life marriage. Those that do will discover estate planning will be much different than with a first marriage when they had fewer assets and beneficiaries.
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The Henson Trust has become fairly common estate planning tool for those looking to provide a bequest to someone who may be receiving government benefits such as ODSP without such an individual losing their qualification to the government benefits. At the core of the Henson Trust is the concept that the trust is wholly discretionary, with the assets that are placed in the trust not “vesting” in the beneficiary who is receiving the government benefits until the trustee has decided to make a distribution in their favour. This allows the trustee to ensure that the beneficiary does not receive a greater amount from the trust in a given time period than allowed under the government benefits, such that the beneficiary can continue to receive their government benefits as well as receive funds from the trust.
But what happens to any funds that may be left in the trust upon the death of the beneficiary for whom the Henson Trust was primarily established? Typically, the terms of the trust will provide for a “gift-over” of any residue to an alternate beneficiary. If the trust fails to provide for such a “gift-over” however, it could have significant repercussions to the primary beneficiary for whom the Henson Trust was established, and could result in the Henson Trust being declared void.
For a trust to exist it must have what are known as the “three certainties”. They are:
- Certainty of Intention – It must be clear that the settlor intended to create a trust;
- Certainty of Subject Matter – It must be clear what property is to form part of the trust; and
- Certainty of Objects – It must be clear who the potential beneficiaries of the trust are.
A trust that does not have the “three certainties” is an oxymoron, insofar as there can be no trust that offends the three certainties as the trust failed to be established. In the circumstance contemplated above, the lack of “gift-over” upon the primary beneficiary’s death would arguably equate to there being a lack of “certainty of objects”, insofar as it is not clear who all of the potential beneficiaries of the trust are. If it is found that the trust does offend the “certainty of objects” it would fail. Should the trust fail, the primary beneficiary for whom the Henson Trust was established would no longer have the funds which would have formed the Henson Trust available to top up the funds which they receive from their government benefits, with such funds likely now forming part of the residue or being distributed on a partial intestacy.
Although the historical application of the “three certainties” would result in the Henson Trust contemplated above having been declared void from the beginning, insofar as no trust that offends the three certainties can be found to exist, it should be noted that the court in Stoor v. Stoor Estate, 2014 ONSC 5684, went to great lengths to avoid such an outcome. In Stoor Estate, notwithstanding that the court found that the trust in question failed as a result of it offending the three certainties for a lack of “certainty of objects”, the court delayed the failure of the trust until after the primary beneficiary’s death believing that it was in keeping with the testator’s intentions.
There has been significant debate about whether the Stoor Estate decision was correctly decided, and what impact, if any, it should have upon the historical application of the “three certainties”. What is not in debate however is that it is important that when drafting a Henson Trust, or any trust for that matter, to ensure that you provide for a gift-over of the residue upon the primary beneficiary’s death. If you fail to provide for such a gift-over you run the risk that the trust will be declared void for offending the three certainties, thereby depriving the individual for whom you were establishing the Henson Trust the opportunity to receive such funds in addition to their government benefits.
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We have written over the years about lapsed gifts and the anti-lapse provisions contained in section 31 of the Succession Law Reform Act. A lapsed gift is one that fails because it is incapable of taking effect. One of the most common reasons that a gift is incapable of taking effect is that the beneficiary predeceases the testator. In determining whether the gift has lapsed, one must first determine what kind of gift it is – a class gift or a gift nominatum.
A class gift is made to a group of individuals who share a common characteristic – for example, “to all my grandchildren”. The testator may not have any grandchildren when they execute their will but want to provide for any future grandchildren; or the testator may have two grandchildren and could have more grandchildren in the future. With a class gift, the number of beneficiaries in the class may increase or decrease; it allows others to join in the gift after the will is executed. Membership in the class closes on whatever date is named in the will.
The other type of gift, a gift nominatum, is a gift to a specifically named or identifiable person or persons – for example, “to John Doe”. In this case, the beneficiaries of this gift are limited to those named, which is to say that the will is closed once it is executed. If the beneficiary predeceases the testator, then the gift will lapse. Generally, drafting solicitors will insert gift-over clauses to prevent a lapse. A gift-over provision simply provides a gift of the property to a second recipient if a certain event occurs – like the death of the first recipient.
However, one must be careful with the language employed. Describing the beneficiaries by number is generally considered a gift nominatum, unless there is clear intention that the testator intended a class gift. Therefore, a gift to “my two grandchildren” will prima facie be considered a gift nominatum that is not open to new members. The only beneficiaries under this clause would be the testator’s two grandchildren at the time the will was executed. But a gift “to my grandchildren that survive me” is a valid a class gift.
It is important to ensure that the testator’s intentions with regard to the type of gift are clearly expressed, and if making a class gift, it is equally important to set out specific rules to determine when membership in the class closes in order to avoid future litigation. Finally, whether making a class gift or a gift nominatum, it is prudent to include a gift-over clause to avoid unintended consequences.
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Spouses commonly execute virtually identical Wills, called “mutual wills”, on the assumption that each will give the same gifts on death out of the same “family” pool of property. Oftentimes the residue of the estate of the first spouse to die is left to the surviving spouse, as long as he or she lives at least 30 days after the death.
A problem can arise if both Wills provide for the same gifts in case of simultaneous death or death within 30 days. If both spouses do in fact die within 30 days of each other then an unintended double legacy could result.
The following wording might cause exactly that problem in a mutual will scenario (and perhaps should be avoided or redrafted):
1. I direct my estate trustee to pay or transfer the residue of my estate to my said Husband ( Wife) if he (she) survives me by at least thirty days.
2. If my said Husband (Wife) dies before me or fails to survive me by at least thirty days, then I direct my estate trustee to pay $100,000.00 to my daughter Sue and pay or transfer the residue to my son Joe.
If both spouses have that wording in their wills, and both die within 30 days of each other, Sue might get two gifts of $100,000 for a total of $200,000 at Joe’s expense, even though only one $100,000 gift was intended. Joe would not be a happy beneficiary.
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This week on Hull on Estate and Succession Planning, Ian and Suzana discuss dealing with estate planning and encouraging everyone to draw up a will.