Tag: multiple wills
Over the past few months, since the release of Re Milne, 2018 ONSC 4174, estate practitioners have been in turmoil over the decision which found that wills are trusts that must have certainty of object, subject-matter, and intention. As a result of the uproar caused by the decision, the Divisional Court expedited a hearing of the appeal of Re Milne. Four and half months later, the estates bar and individuals with multiple wills can now rest easy with the Divisional Court’s decision in Re Milne, 2019 ONSC 579.
The Lower Court Decision
At the lower court, Justice Dunphy found a primary will to be invalid where an allocation clause in the will provided the estate trustees with the discretion to determine which estate assets fell under the secondary will or the primary will based on whether probate of such assets would be required. Justice Dunphy found that such allocation clauses resulted in there being no certainty of subject-matter with respect to the primary will as assets could be allocated between the two wills after death (the secondary will, on the other hand, was worded in such a way that it was found to validly capture all of the testator’s assets).
In particular, Justice Dunphy took issue with the conferral of discretion upon the estate trustees to determine which assets, if any, would fall under the primary will. The allocation clause at issue specifically provided for the exclusion of assets from the primary estate “for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for a transfer or realization thereof.” Justice Dunphy found that this clause granted the estate trustees the power to determine which assets, if any, were subject to the will based on the “subsequent, subjective determinations of the Estate Trustees as to what is desirable.” Justice Dunphy further found that the assets that fall under a particular will must be objectively ascertainable at the time of death, and not subject to the subsequent discretion of the estate trustees.
The Issues on Appeal
The estate trustees appealed the lower court decision on the following issues:
- Did the Application Judge err in holding that a will is a trust?
- Did the Application Judge err in holding that the “three certainties” determine the validity of a will?
- Did the Application Judge exceed the Court’s inquisitorial jurisdiction? (the Court agreed that the Application Judge exceeded his jurisdiction, but found that such a conclusion was unnecessary to decide the appeal).
A Will is Not a Trust
As many will recall, the lower court decision began with the proposition that “a will is a form of trust. In order to be valid, a will must create a valid trust and must satisfy the formal requirements of the Succession Law Reform Act, R.S.O. 1990, c. S.26.” No precedent was provided for this statement and it was this finding which ultimately led to the finding that the allocation clause contained in the primary will resulted in a lack of certainty of subject matter and therefore the invalidity of the primary will.
The Divisional Court found that a will is not a trust on the following basis:
- the definition of a “will” in the Succession Law Reform Act does not state that a Will is a trust;
- a will can contain a trust, but is not required to;
- during the administration of an estate, no separate beneficial interest exists – the property comprising the residue of the estate is not held in trust for the beneficiaries; and
- historically, courts of chancery were responsible for oversight of the administration of estates and trusts, such that the law with respect to executors of estates and trustees of trusts share similarities, however, the roles remain distinct, despite conflation that now exists between the two roles.
Finally, the Divisional Court found that even if section 2(1) of the Estate Administration Act, which vests the property of a deceased person in their personal representative “as trustee for the persons by law beneficially entitled thereto”, resulted in the creation of a trust, such a trust would be a statutory trust and therefore not subject to the “three certainties.”
The Primary Will Contains Certainty of Subject Matter
Although the Divisional Court found that wills are not trusts and that even if they are trusts, they are not subject to the “three certainties”, the Court went on to consider whether the use of an allocation clause in multiple wills would result in a lack of certainty of subject matter.
The Court held, at paragraph 49, that:
The property in the Primary Wills can be clearly identified because there is an objective basis to ascertain it; namely whether a grant of authority by a court of competent jurisdiction is required for transfer or realization of the property. As a result, the Executors can allocate all the deceased person’s property between the Primary and Secondary Wills on an objective basis.
Thus the Court found that there was no lack of certainty of subject matter as the allocation clause provides an objective criteria for determining which will an asset might fall under, being the objective determination as to whether probate is required to handle the asset.
Furthermore, earlier in the decision (at paragraph 24), the Court confirmed that the discretionary nature of an allocation clause does not mean that it can be exercised arbitrarily and that executors must exercise such discretionary powers in accordance with their fiduciary obligations.
Although not explicitly stated, it appears from these findings that the Divisional Court found that allocation clauses are valid discretionary powers which may be conferred on estate trustees. Such a finding may provide further comfort to those concerned, not only about the issue of whether a will is a trust, but the separate issue of whether a testator may confer such a discretionary power on estate trustees. As it stands, the Divisional Court’s decision supports the validity of allocation clauses.
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The recent decision of Re Milne, 2018 ONSC 4174, has caused a lot of discussion among estate planners and litigators. As a recap, in that decision, Justice Dunphy of the Superior Court found that multiple Wills were invalid where so-called “basket clauses” in the Wills provided the Estate Trustees with the discretion to determine which estate assets fell under which Will. The Court found the Wills to be invalid on the basis that Wills are a form of trust and therefore must meet the requisite three certainties of a valid trust (see our blog on the decision here). The decision is now under appeal and many are eagerly awaiting the outcome.
In the interim, estate planners and litigators should be aware of the recent decision of Re Panda, 2018 ONSC 6734, which directly addresses and declines to follow Re Milne.
Like in Re Milne, probate was sought for a Primary Will where a Secondary Will was executed which contained a different, but substantively similar, basket clause allowing the Estate Trustee of the Will to essentially determine which assets fell under the Primary Will and which assets fell under the Secondary Will. The application for probate came before Justice Dunphy who refused to grant probate. A motion for directions was then heard by Justice Penny who carefully analyzed the decision of Re Milne before granting probate.
The Issues in Re Panda
Justice Penny analyzed one procedural issue and two substantive issues, being:
- whether, on an unopposed application for a certificate of appointment as estate trustee, it is appropriate to inquire into substantive questions of construction of the will or whether the inquiry is limited to “formal” validity of the will for purposes of probate [the procedural issue];
- whether the validity of a will depends upon the testamentary instrument satisfying the “three certainties” which govern the test for the valid creation of a trust; and
- whether, apart from the questions of the validity of the will itself, a testator can confer on his or her personal representatives the ability to decide those assets in respect of which they will seek probate and those in respect of which they will not.
Probate vs. Construction
Unlike Justice Dunphy in Re Milne, Justice Penny found that at the stage of determining whether to grant or deny probate, a Court must determine only whether the document presented is a Last Will and Testament. The formal requirements under the SLRA must be met and it must be determined whether the document is testamentary in nature (i.e. disclosing an intention to make a disposition of the testator’s assets on death). Beyond that, Justice Penny found that broader questions of interpretation, including the validity of the conferral of authority to decide under which Will property will fall, should be addressed separately as matters of construction, not on probate applications.
A Will is Not a Trust
Justice Penny also disagreed that a Will was a form of trust such that a Will requires certainty of intention, object, and subject-matter. As stated by Justice Penny, “A will is a unique instrument. A will shares some of the attributes of a contract and some of the attributes of a trust but it is neither; a will is its own, unique creature of law.”
Validity of Estate Trustees’ Authority to Determine Which Assets Fall Under Which Will
With respect to the final issue, Justice Penny found that such a question involves the issue of the construction of a particular instruction to or power conferred in the Wills to the estate trustees. Justice Penny therefore found that it would be inappropriate to make any determination as to the scope and validity of the basket clause found in the Wills as such issues were not before him on the Application for Probate; however, in obiter, Justice Penny went on to note that it was not clear how the basket clauses in issue were “any more extreme or ‘uncertain’ than other, well-established discretionary choices frequently conferred on and exercised by estate trustees.”
Until the determination of the appeal of Re Milne is in, the decision in Re Panda may provide some comfort to practitioners worried about the implication of Re Milne.
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Multiple wills are an extensively used estate planning tool designed to reduce the amount of Estate Administration Tax payable. Essentially, the grant of a Certificate of Appointment is limited to the assets referred to in the will that is being probated, and Estate Administration Tax is only paid on the assets falling under the will that is being probated.
This estate planning strategy was tested and approved by the courts in Granovsky Estate v. Ontario.
Where there is only one will, can similar probate fee/administration tax savings be accomplished by applying for a limited grant? According to the Manitoba Court of Appeal decision of Pollock v. Manitoba, the answer is NO.
In Pollock, the deceased died leaving personal property, mainly shares in privately held corporations, having a value of about $12.5m, and real property having a value of $1m. Probate was required to deal with the real property, but not required to deal with the shares. If probate could be obtained in relation to just the real property and not the value of the shares, the estate would save $75,000 in probate fees. (Using current Estate Administration Tax rates in Ontario, the saving under such a scheme would be $187,500!)
The Manitoba legislation allowed the administration of an estate of a deceased person to be limited to certain assets “as the court thinks fit”. The Manitoba Court of Appeal considered a long line of cases dealing with the issue and concluded that the court must have a “strong reason” for making a limited grant, and stated “I do not regard the saving of probate fees as a sound reason for making a limited grant of probate. An applicant for a limited grant is, of course, entitled to take the least expensive way of administering an estate, but the chosen way must be one permitted by the legislation. The saving of probate fees is not, as I see it, a sufficiently strong reason to justify a limited grant. Nor is a limited grant a money-saving device contemplated by the legislation.”
In Ontario, the Rules of Civil Procedure specifically allow for limited grants. However, the grant is “limited to the assets referred to in the will”: Rule 74.04(1). Thus, in Ontario, if there is only one will, the result would be as in Pollock: even if probate of the will was needed in order to deal with only one asset, Estate Administration Tax would need to be paid on all assets of the estate.
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In today’s podcast, Paul Trudelle and Sayuri Kagami discuss the recent decision of Re Milne Estate, 2018 ONSC 4174, where Justice Dunphy of the Ontario Superior Court found a Will to be invalid where it provided the Estate Trustee with the discretion to determine whether assets might fall under the Will or not. At the time of recording, it was unknown whether the decision would be appealed. It is now confirmed that the decision is under appeal.
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
Last year, a regulation to the Estate Administration Tax Act, 1998, S.O. 1998, c. 34, Sched. (the “EATA”) came into effect requiring estate trustees to file an Estate Information Return (“EI Return”) with the Ministry of Finance within 90 days after issuance of a Certificate of Appointment of Estate Trustee. The EI Return must include information with respect to the “value of the estate”. Under the EATA, this term is defined as “the value which is required to be disclosed under section 32 of the Estates Act (or a predecessor thereof) 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.”
Section 32 of the Estates Act, R.S.O. 1990, c. E.21, among other things, provides in subsection (3) that “Where the application or grant is limited to part only of the property of the deceased, it is sufficient to set forth in the statement of value only the property and value thereof intended to be affected by such application or grant.” This means that any assets that are governed by a Will that is not being submitted for probate are not required to be disclosed on the EI Return. Accordingly, if an individual has multiple wills, any assets governed by their Secondary Will do not have to be disclosed on the EI Return.
Multiple wills are used in estate planning to deal with a testator’s assets and belongings that do not require a Certificate of Appointment of Estate Trustee to transfer and distribute, therefore avoiding the need to pay Estate Administration Tax on the value of those assets and belongings. With the introduction of the EI Return, there may be increasing motivation for testators to use multiple wills in their estate planning. In providing their valuation of the estate being administered, estate trustees will now be required to substantiate the valuation used. This may require formal valuations, such as appraisals, which may result in significant costs to the estate.
For example, if a testator has a number of pieces of art and jewelry, which can be transferred without a Certificate of Appointment, the estate trustee would be required to have appraisals performed on each piece in order to substantiate their valuation for the EI Return. In this situation, it may be more efficient, both in terms of cost and in terms of the time required to complete the formal valuations, to distribute those assets through a Secondary Will. Testators and solicitors should consider whether the costs of determining the value for each and every item or asset may be higher than the expenses involved in preparing multiple wills. It may be that, with the EI Return now in effect, a lower threshold for the value of a testator’s assets may justify an estate plan that involves multiple wills.
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Drafting and administering multiple wills can be challenging. There is no shortage of potential pitfalls that can derail an otherwise well devised estate plan. Inadvertent revocation of the primary will, conflicts between multiple sets of Estate Trustees (“Trustee”), and limited liability protection for the Trustee of the non-probated will are just a few of the difficulties sometimes encountered. However, one of the most challenging aspects is determining from where the taxes will be paid. Tax apportionment can complicate the estate plan for the Testator and drafter early on in the process; or afterwards, as the Trustee is left to interpret the directions (or lack thereof) in both wills.
For instance, two carefully drafted wills which seek to distribute the assets evenly among the Testator’s children can be significantly altered if the tax apportionment clauses do not reflect this intent. Imagine that one child receives real property under the primary will and the other receives privately owned shares of an equivalent value under the secondary will. If the income tax is payable solely from the assets of the primary will, one child may no longer receive an equal value of the estate; contrary to what the Testator intended.
There is some debate on whether the distinction between a one or two estate model can help determine tax apportionment issues. The question is whether the Testator has created two distinct estates or one estate that is governed by two documents? Clare Sullivan suggests the latter; however, Martin Rochwerg and Leela Hemmings advocate for the two estate model. They describe dual wills as dividing the estate into a primary and secondary estate. This distinction may have tax liability implications when the wills do not contain any tax apportionment clauses whatsoever. When the issue is one of interpretation, the answer is a much simpler one.
In interpreting tax apportionment questions, it all comes down to the Testator’s intent. The interpretation of wills is based on the armchair rule that seeks to place oneself in the mindset of the testator. The same approach is applied to interpreting from where the taxes will be paid when the wills are unclear. In other words, a close examination of both the primary and secondary wills themselves will determine where the Testator intended the tax to be paid from. External factors such as the sophistication of the testator may also be considered when interpreting the documents. If the wills are altogether silent, the default tax rules will apply.
From a practical perspective, this means that the issue of tax liability should always be stated in unequivocal terms in the wills. The Trustee, in administering the estate, should also never blindly assume that the tax is payable out of the primary will. They should carefully read the documents before making this determination and if it is unclear, an application to the court for interpretation is an available recourse.
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Today on Hull on Estates, Jonathon Kappy and Joshua Eisen discuss benefits and pitfalls related to multiple Wills. Should you have any questions, please email us at email@example.com or leave a comment on our blog page.
Click here for more information on Joshua Eisen.
Today, it is quite common for Canadians to own property in the U.S. or other foreign jurisdictions. Having multiple Wills may help protect a testator’s Canadian assets from foreign tax claims, as illustrated in the British Columbia case of Barna Estate (1990), 40 E.T.R. 89 (B.C.S.C.).
In the Barna Estate case, the deceased died owning real property in Europe and substantial personal assets in Canada. The deceased had lived and died in France. She left two Wills. One was a French Will, dealing with her real property in Europe. The second was a Canadian Will, dealing with her cash, bonds and other financial assets in Canada. None of the beneficiaries under either Will were related to the deceased.
Under the applicable French law at the time, beneficiaries not related to the deceased could be liable to pay a 60% tax on the value of the deceased’s worldwide estate.
Canada Trust, the executor named in the Canadian Will, brought an application for the court’s advice as to whether it should pay all debt and succession duties in respect of property passing under both Wills, or whether it should only pay Canadian succession and death duties in respect of property passing under the Canadian Will.
There is a presumption that a testator’s intention is for the law of the jurisdiction in which she resided at the date of execution of a Will shall apply. In this case, the deceased was living in France at the date of execution of the Canadian Will, and according to the presumption, the Will should be interpreted in accordance with French law. However, the presumption is a rebuttable one, and the court ultimately found that the deceased had intended that her Canadian Will be governed by the law of British Columbia.
Once the court decided that the Canadian Will was governed by the law of British Columbia, the court had to interpret the payment of taxes clause in the Canadian Will. Given, among other things, that the deceased’s European property was specifically excluded from the Canadian Will, the court ruled that Canada Trust, as trustee, was only required to pay the death and succession duties in respect of property passing under the Canadian Will.
Have a great day!
Bianca La Neve