Life insurance can be an important part of an estate plan, be it taken out to fund payment of anticipated tax liabilities triggered by death, to assist in supporting surviving family members, or to equalize the distribution of an estate within the context of the gift of an asset of significant value (such as a family business) to one child to the exclusion of another, who can be designated as beneficiary of the policy.
In a time when many Canadians are facing their mortality and taking the pause from normal life as an opportunity to review and update estate plans, many Canadians are turning their minds to other aspects of estate planning, including supplementing an estate plan with life insurance. A recent Financial Post article suggests that life insurance applications have doubled during the pandemic, as more Canadians take steps to plan for the unexpected during this period of uncertainty.
At the same time, premiums for new permanent life insurance policies have increased by as much as 27%. While term life insurance policies may remain a more affordable option, they too are anticipated to become more expensive, with upcoming premium increases of up to 20%. The increase in premiums has been linked to lowering interest rates and restrictions to the investment options available to insurance companies.
Other changes to life insurance during the pandemic include the exclusion of the standard medical examination required in order to obtain some types of coverage. The maximum coverage offered by many providers without a medical exam has increased to reflect limitations to the ability for applicants to safely attend an in-person examinations. For other providers and types of plans, medical examinations are simply on hold.
Lastly, insurance companies have updated intake questionnaires to include COVID-screening questions. If an applicant is experiencing potential symptoms, they may be required to wait two weeks before taking out the policy, but are not typically ineligible from coverage altogether. Some insurers, however, are no longer offering new coverage to seniors or others who are at a higher risk of complications during the period of the pandemic.
One life insurance provider has already doubled its projected COVID-19-related payouts during 2020 from the figures it had released earlier this year. While there may have been changes to certain eligibility requirements and the cost of life insurance, it remains a suitable estate planning tool for many Canadians.
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Recently, the Ontario Court of Appeal ruled that even where a gift is not validly executed, the intention of the parties can still be fulfilled through a bare trust.
A father made a profitable investment that was held by his wife in trust for their three children in equal shares. One brother sold his share of the investment, so that the remaining portion of the investment was to be divided 50/50 between his brother and sister. The sister subsequently disclaimed her share of the investment for tax reasons, with the result that her share reverted back to the mother. It was understood and orally communicated that the mother would hold the investment and gift the income from the investment to the sister, with the principal coming back to the sister as part of the mother’s inheritance. When the mother was eventually declared incapable and the brothers became their mother’s Attorneys for Property, they were suspicious of this arrangement between their mother and their sister, and brought an action against the sister and her husband.
The main issue was whether the past and future proceeds of the investment had been validly gifted by the mother to the sister, and whether the sister’s husband, who had assumed responsibility for using the proceeds, was liable as trustee de son tort.
In the initial ruling, the application judge rejected the sister’s claim to the funds and held that the gift from the mother was invalid. Funds had been transferred by the mother to the sister through signed blank cheques. A valid gift requires delivery from the donor to the recipient (Bruce Ziff, Principles of Property Law, 6th ed. (Toronto: Carswell, 2014); Teixeira v. Markgraf Estate, 2017 ONCA 819, 137 O.R. (3d) 641, at paras. 38, 40-44), and the gift was not considered delivered until the cheque had been cashed. In this case, by the time the cheques were cashed by the sister, the mother had been declared incapable and lacked the capacity to gift. The judge ruled that the money belonged to the mother, and that the sister and her husband had to account for it, and the husband was liable as trustee de son tort.
This result was overturned recently in the Court of Appeal. The court found that the applicable legal mechanism here was not a gift, which was invalid, but instead was a valid bare trust. A bare trust is where the trustee has no obligations other than to convey the trust property to the beneficiaries on their demand (Donovan W. M. Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) at pp. 33-34).
The decision turned on whether there had been sufficient certainty of intention from the mother to create a bare trust, and the court found that there had been. The trust did not have to be formally evidenced in writing because the trust property was funds in a bank account and not land or an interest in land (Statute of Frauds, R. S. O. 1990, c. S.19, ss. 4, 9-11; see also In the Estate of Jean Elliott (2008), 4 E. T. R. (3d) 84 (Ont. S. C.) at para. 42.). There was sufficient evidence in the conduct of the parties to show an intention for the funds to be held for the sister as well as one of her brothers in equal shares, and the certainty of intention for the mother to hold the money as bare trustee was satisfied. As there was a valid trust, the husband was not liable as trustee de son tort because he had not acted inconsistently with the terms of the trust. While the proceeds that had already come from the investment were held on bare trust by the mother, the future distributions from the investment were not, as future property cannot be the subject matter of a trust (para. 58 and 84 of the judgment).
Moral of the story
This is a great indicator of how, when a gift is invalid, the court will use the legal mechanism of a bare trust to give effect to the intention of the parties, so long as their intention is sufficiently certain.
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Ian M. Hull and Sean Hess
A decision released earlier this week highlights the importance of a complete Management Plan supported by evidence when seeking one’s appointment as guardian of property.
Sometimes, the necessity of filing a Management Plan is viewed as a formality without proper attention to the details of the plan. However, the failure to file an appropriate Management Plan may prevent the appointment of a guardian of property, putting the administration of the incapable’s property in limbo.
In Connolly v Connolly and PGT, 2018 ONSC 5880 (CanLII), Justice Corthorn declined to approve of a Management Plan filed by the applicant and, accordingly, refused to appoint her as guardian of property. The Management Plan was rejected for the following reasons (among others):
- it did not address an anticipated increase in expenses over time (including when the applicant was no longer available to serve as the incapable’s caregiver and he may incur alternate housing costs);
- there was no first-hand evidence from BMO Nesbitt Burns or Henderson Structured Settlement with respect to the net settlement funds in excess of $1.4M and their payout and investment in a portfolio on the incapable’s behalf;
- the Court was concerned that stock market volatility could threaten to deplete the invested assets;
- the Public Guardian and Trustee had strongly recommended that the applicant post security, the expense of which was reflected as a deduction from the incapable’s assets (while not suggested that this was unreasonable, Justice Corthorn took issue with the absence of any case law or statutory provision cited by the applicant in support of the payment of the expense by the incapable rather than the applicant herself); and
- while the applicant had agreed to act as guardian without compensation, the plan did not contemplate how compensation would be funded if claimed by a potential successor guardian.
Notwithstanding that neither the incapable nor the Public Guardian and Trustee had opposed the Management Plan or the appointment of the applicant as guardian of property, Justice Corthorn found that the appointment of a guardian to manage over one million dollars in settlement funds was “contentious” and, accordingly, under Rule 39.01(5) of the Rules of Civil Procedure, direct evidence from a representative of the financial institution was required. In short, although the applicant was accepted as being a suitable candidate for appointment as guardian of property (and it was anticipated by the Court that she would ultimately be appointed), the Court was not satisfied on the evidence available that the management of the incapable’s property in accordance with the contents of the Management Plan was consistent with the man’s best interests.
While Justice Corthorn declared the individual respondent incapable and in need of assistance by a guardian of property, Her Honour adjourned the balance of the matter, suggesting that the applicant’s appointment as guardian of property could be revisited once additional evidence was filed in support of the contents of the Management Plan and/or the plan was further revised.
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The financial industry is relentless in encouraging Canadians to “plan for the unexpected” – and highlighting how anything can happen. You could lose your job, become disabled, lose your home to a fire, lose a loved one – the list of possible bad news seems endless.
The solutions that the industry is pushing – emergency funds, insurance, retirement savings – are all smart choices, and it’s important to have protections against bad news in place. But what about the good news? Do we need a plan of action when happy financial events occur?
The answer is absolutely. But luckily, your actions can take place after the good news. Unlike the bad news event, no advance planning is required.
Unexpected good financial news can come in many forms: an inheritance, large gift, work bonus or promotion, or a rapid rise in the value of shares that you own. And if you experience financial good fortune, it’s important to integrate the unexpected additional assets into your financial plan.
For example, with a more secure financial base, you may be more comfortable with investment risk, and more willing to adopt a more aggressive investment strategy to enhance your long-term returns. Conversely, if your savings are already aggressively invested to achieve your retirement goals, the additional wealth may allow you to structure a more moderate risk portfolio.
If you are currently retired, financial good fortune can also affect your retirement income strategy. If you draw on your new funds to meet your immediate cashflow needs, you’ll be able to withdraw less taxable income from your registered plans – and this could significantly lower the taxes you pay.
Of course, the most unexpected – and most unlikely – piece of good financial news is what nine Montreal co-workers received around Christmas: a $60 million lottery win, representing nearly $7 million each. The group seemed surprisingly tight-lipped in the press reports, not even disclosing where they worked. But you definitely get a sense that this is a savvy group who will plan well.
And while the article below contains advice for a lottery win, it really applies to any financial windfall.
Enough of the bad news – here’s to good financial fortune for you in 2018.
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This week on Hull on Estates, Ian and Noah discuss the importance of prudent investment by a trustee in light of the decision in Mowry v Groome.
Beginning April 10, 2017, the United States Department of Labour will implement what is being referred to as the “Fiduciary Rule“. The Fiduciary Rule will require American investment advisors to satisfy a higher standard of care when providing investment recommendations, putting clients’ interests above their own and providing complete disclosure with respect to fees and potential conflicts of interest.
The standard of fiduciary, premised on a role of trust and the duty to act in utmost good faith, is applied to guardians of property and the person, attorneys of property and personal care for incapable grantors, estate trustees, and other types of trustees. While commentary regarding the Fiduciary Rule recognizes that investment advisors should be (and often are) already guided by the best interests of investor clients, some who earn commission on the sale of certain products may be in a position of conflict. The Fiduciary Rule will prevent advisors from making certain recommendations if they are not in the client’s best interests. The new standard of care required of American investment advisors may to some extent fall short of that applied in respect of other traditional fiduciaries, and is subject to a number of exceptions.
Absent the implementation of the Fiduciary Rule or equivalent requirements in other jurisdictions, investment advisors are not typically treated as fiduciaries. Contracts may specifically state that advisors are not acting in a fiduciary role and that they do not absorb risk on their clients’ behalf related to investment advice that is followed. Typically, if something goes wrong and an investor wishes to pursue a claim against his or her advisor, the onus is on the investor to prove the fiduciary nature of the relationship. If the investor is able to prove that a fiduciary obligation existed (factors include the length of the relationship, the sophistication of the client, and the demonstrated reliance on the advice of the advisor), the advisor must then show that he or she has discharged the duty in good faith and with full disclosure.
Although the Fiduciary Rule is scheduled to come into effect on April 10 of this year, it is anticipated that the new Trump administration may delay the applicability of the Fiduciary Rule for the time being. Although there have been discussions with respect to raising the standard of care of investment advisors in Canada, where extensive regulations already apply, an equivalent to the U.S. Fiduciary Rule has not yet been introduced.
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