Tag: Succession Planning
At the recent 19th Annual Estates and Trusts Summit, Jordan Atin, counsel to Hull & Hull LLP, gave a very useful talk about how to change trustees. Jordan explained the significant difference between an executor and a trustee. He also emphasized the importance of the trust instrument as a tool to avoid running into trouble when a trustee wishes to retire.
Trustee or Executor?
In a will, a testator often appoints the same one or two individuals to act as both executor and trustee. What’s the difference? An executor is the personal representative of the testator; he or she stands in the shoes of the testator and exercises the testator’s rights and fulfills the testator’s obligations. The role of the executor is often a simple one: to settle debts and administer the property of the estate. Once those tasks are finished, the role of the executor is finished. On the other hand, a trustee of a testamentary trust holds the trust property for another, pursuant to s. 43(2) of the Trustee Act. In McLean, Re, the court explained the difference: once a testamentary trust begins, the executor`s duty is complete. The duties of a trustee often last for a longer period than those of the executor.
Why does this distinction matter? Once an executor takes steps to administer the estate, he or she may not retire from the position without a court order. A trustee, on the other hand, may resign pursuant to sections 2 and 3 of the Trustee Act. Someone may also resign as trustee while continuing to act as an executor.
Remember the Trust Instrument
If there are three or more trustees, one trustee may retire without the appointment of a replacement trustee. Where there are one or two trustees, a trustee can retire pursuant to section 3 of the Trustee Act. The rules in the Trustee Act are complex, and an application to court may still be necessary, if there is any disagreement about whether the conditions listed in section 3 apply to the facts at hand.
Accordingly, Jordan emphasizes the importance of considering replacement of trustees when drafting the trust instrument. Section 67 of the Trustee Act states that the powers bestowed by the Act are in addition to and subject to the terms of the trust document. Thus, a drafting solicitor may opt out of sections 2 and 3 of the Trustee Act. The document itself should be the first place co-trustees and beneficiaries look in replacing a trustee. By providing a clear procedure for the removal and replacement of trustees in the trust document, potential confusion and uncertainty about whether section 2, 3, or 5 of the Trustee Act should be used can be avoided.
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Dividing one’s personal property upon death can be a contentious matter. If an item of personal property is not specifically gifted to an individual, there is a chance that the beneficiaries may find themselves litigating.
A specific bequest can provide clarity. Pursuant to Black’s Law Dictionary, a specific bequest is “a legacy of a specified property or chattel to a particular person that is detailed in a will.” We have previously blogged on the use of specific bequests.
Another way to give personal property is through the use of a memorandum attached to the will. This memorandum may be updated to list all of the personal property being gifted, and can either be binding (assuming certain requirements are met) or precatory. We have previously blogged on the use of a memorandum to give personal property.
The use of a specific bequest or a memorandum may help to avoid battles over personal property. If personal property is not given to an individual through a specific bequest, an individual may receive items through a percentage division of either such property (e.g. “to be equally split between my two sons”), or the residue.
One possible issue with giving a percentage division of property or leaving residue to the beneficiaries, is that they may fight over specific items. This is what is happening with the Estate of Audrey Hepburn. In Audrey Hepburn’s will, she left a storage locker as part of the inheritance for her two sons. The locker was filled with various items including fashion accessories, posters, awards, scripts, and pictures, and was to be shared equally. Her two sons are now in dispute over who gets to keep what items in the locker. If Hepburn were to have specified the items to be given, it is possible that this inheritance dispute could have been avoided.
While specific bequests and memoranda are helpful in certain circumstances, it is important to consider the potential value of the bequest before gifting it. Valuations are important in order to ensure that the property being gifted is truly representative of the testator’s intention in leaving the property. For example, an individual may decide to leave each of her sons a separate painting. Without a valuation, this seems like an equitable arrangement. With a valuation, however, it may be that one painting is worth $300.00, and the other is worth $3,000.00. Equalizing the value of personal property may be an important consideration in making a specific bequest in order to avoid potential litigation.
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What happens if an individual dies intestate, and upon application for a Certificate of Appointment of Estate Trustee Without a Will, a Not Clear Certificate is returned to the applying party?
Pursuant to Rule 74.12 of the Rules of Civil Procedure:
(1) A certificate of appointment of estate trustee shall not be issued until the court has received from the Estate Registrar,
(d) on an application where there is no will, a certificate that no will or codicil has been deposited in the Superior Court of Justice.
A will being deposited in the Superior Court of Justice does not necessarily mean that the will belongs to the deceased individual. Therefore, while one may receive a Not Clear Certificate (“Certificate”) from the Estate Registrar for Ontario, it does not guarantee that a will exists in the deceased’s name. Rather, the Certificate creates the need for the applicant to take extra steps to ensure that the wills that are deposited with the Superior Court of Justice are not wills that belong to the deceased.
What Steps Should You Take?
A Certificate sent by the Estate Registrar for Ontario will contain a list of different deposit dates and court file numbers, corresponding to wills that are already deposited with the Superior Court of Justice. The listed wills on deposit will all have names similar to that of the deceased individual.
Upon receipt of the Certificate, it is the applicant’s or their lawyer’s responsibility to track down each of the deposited wills, in order to prove that they do not belong to the deceased. This involves attending the Registrar of the Court where the will has been
deposited. In some circumstances, faxing the Certificate will suffice. The Registrar will then deliver to the applicant a photocopy of the Envelope for Will on Deposit. This will allow the applicant to make the necessary investigation to determine that the will on deposit is not the will of the deceased. The Envelope for Will on Deposit contains the name of testator, the testator’s address, the name of the executor, the executor’s address, and the date the will was deposited for safe keeping.
Once the applicant gathers all of the Envelopes for Will on Deposit, the applicant must go through the envelopes and ensure they do not belong to the deceased. The applicant must then prepare an Affidavit stating that each Envelope for Will on Deposit does not belong to the deceased. The Affidavit should be filed at the Court, along with the Certificate. Once the Court is satisfied the deposited wills do not belong to the deceased, a Certificate of Appointment of Estate Trustee Without a Will should be issued. If the will does, in fact, belong to the deceased, different steps will need to be taken in order to obtain a Certificate of Appointment of Estate Trustee With a Will.
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On occasion, a Court may conclude that a disgruntled beneficiary’s agenda was simply to put up roadblocks to the executor without having any real intention or expectation of successfully challenging the validity of a Will. Such was the case in Elliot v Simmonds  EWHC 732 (CJ), which imposed costs sanctions against an individual whose “passive objection” to a Will was found to unreasonably require the executor to prove the Will in solemn form.
In England and Wales (as in Ontario), a person with a financial interest or the executor may seek proof of a will in solemn form (i.e. in open court) upon notice to all persons appearing to have a financial interest in the estate. The court must be satisfied, upon the examination of the witnesses, of the due execution of the Will and of the testamentary capacity of the testator. The onus of proving due execution and testamentary capacity is upon those propounding the Will. (The Ontario Court of Appeal recently pronounced in detail on proof in solemn form in the context of Rule 75 of the Rules of Civil Procedure in Neuberger Estate v. York 2016 ONCA 191). A previous blog on Neuberger Estate v. York can be found here.
In Elliot v. Simmonds, the Deceased (Mr. Jordan) left his entire estate to his wife (Ms. Elliot) and left nothing to his illegitimate daughter (Ms. Simmonds). Ms. Simmonds lodged a caveat (analogous to a Notice of Objection in Ontario) to prevent Ms. Elliot from obtaining probate. Furthermore, Ms. Simmonds made various allegations impugning the validity of the Will, but took no active steps to produce evidence in support. Eventually, the executor of the estate (Ms. Elliot) had no option but to prove the Will in solemn form.
Pursuant to the Civil Procedure Rules (England and Wales) (“CPR”), on a proceeding proving a will in solemn form, the Objector (in this case Ms. Simmonds) can effectively do nothing but insist that the executor attend at trial and prove the Will. Moreover, Ms. Simmonds (wrongfully, as it turned out) assumed that she was immunized against costs of her actions by part 57.78(5)(b) of the CPR which provides that:
(b) If a defendant [i.e. Objector] gives such a notice [i.e. a Notice of Appearance], the court will not make an order for costs against him unless it considers that there was no reasonable ground for opposing the Will.
At the conclusion of the trial, substantial costs had been incurred by Ms. Elliot who propounded the Will. Ms. Elliot made an application for costs, arguing that Ms. Simmonds acted unreasonably by passively placing the burden on Ms. Elliot to prove the Will notwithstanding that Ms. Simmonds had been in possession of all relevant evidence in advance of the proceeding (which supported the will’s validity), adduced no witnesses or medical evidence to the testator’s capacity, and acted obstructively in the proceedings. As such, the judge agreed with Ms. Elliot and ordered precedent setting costs of GBP65,000 against Ms. Simmonds.
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An in terrorem condition attached to a testamentary gift keeps a beneficiary “in fear” of losing entitlement to the gift, if they partake in certain actions that are noted by the testator.
We have previously blogged about the use of in terrorem conditions, and specifically when the conditions will be upheld, or struck down. Kent v McKay (1982 Carswell BC 187) is authority for the test of striking down an in terrorem condition.
There are two general types of in terrorem conditions.
The first type of condition, and the most common, forbids the beneficiary from contesting the validity of the will. We have previously blogged on this type of in terrorem condition.
The second condition is partial restraint on marriage, which is usually a condition that requires the beneficiary to obtain consent to marry. This condition may only apply if it is clear from the outset that the condition in the will is not a total restraint on marriage. Total restraints on marriage will be void from the outset. A partial restraint on marriage may act to limit a person from marrying a particular individual, or members of a particular class. It is likely, however, that any restraint on marriage will be found void for public policy reasons. The recent Court of Appeal decision in Spence v BMO Trust Company, 2015 ONSC 615, is relevant to the issue of restraint on marriage and public policy. A previous blog on this case can be found here.
Pursuant to the decision of Re Dickson’s Trust (1850) 61 ER 909, in order to validate an in terrorem condition, the testator must show that the condition would be given effect if the testator demonstrated their intention by way of a gift over.
As explained in The Law Relating to Wills: “a condition in restraint o[n] marriage or a condition not to dispute a will, may be annexed to a testamentary gift, but where the subject of gift is personalty, such a condition… must, as a general rule, be accompanied by a gift over, otherwise the condition will be treated as merely in terrorem and therefore, void.” The case of Ketchum v Walton, 2012 BCSC 175, suggests that in terrorem conditions in general have been held to be void, if not accompanied by a gift over.
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Pursuant to section 4 of the Limitations Act, generally, a claim should be started by an individual within two years of the claim being discovered. Section 5 of the Limitations Act, defines discovery as “the day on which a reasonable person with the abilities and in the circumstance of the person with the claim first ought to have known of the matters referred to.”
These provisions raise an interesting estates question: What if an individual was unaware that they were named as a beneficiary of an estate? Would the Limitations Act apply in these circumstances, even though the beneficiary was unaware of their claim?
The doctrine of fraudulent concealment may operate to provide for an equitable tolling of the limitation period. Simply put, this means that discoverability is a factor in considering fraudulent concealment for estates purposes. The doctrine will suspend the running of the limitation clock until the reasonable party can reasonably discover the cause of action.
As stated in Roulsten v McKenny et al, 2016 ONSC 2377 para 41, and as established in Giroux Estate v Trillium Health Centre, 2005 CanLII 1488 (ON CA), “the purpose underlying the doctrine of fraudulent concealment is to prevent defendants who stand in a special relationship with a party from using a limitation provision as an instrument of fraud”. A special relationship can be defined as one in which the plaintiff may rely on the defendant’s word and defendant ought to reasonably foresee that the plaintiff would rely on his representation.
As defined in the case of KM v HM,  3 SCR 6, at para 65, “‘Fraud’, for the purposes of fraudulent concealment, is defined as “conduct which having regard to some special relationship between the two parties concerned, is an unconscionable thing for one to do towards the other.”
As established through the existing jurisprudence, in order to make out the doctrine of fraudulent concealment, there are three necessary elements:
- the defendant and the plaintiff are engaged in a special relationship with one another;
- the defendant’s conduct is unconscionable; and
- the defendant conceals the plaintiff’s right of action
As stated above, if an individual was unaware that they were the beneficiary of an estate, and a named estate trustee actively concealed the fact, it is possible that the remedy of fraudulent concealment provision would apply. It appears the provision will not apply if you knew or ought to have known that you were a beneficiary of an estate.
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A recent story in the news featuring a fraudulent wedding officiant, raises some interesting estate planning issues. Mr. Cogan, who held himself out as an authorized wedding officiant, was charged with performing unauthorized marriages. Cogan had been licensed to perform marriages in the past, but it is reported that his license was revoked before he performed at least 48 marriages between August 2013 and July 2016.
Fortunately, pursuant to section 31 of the Marriage Act, if the couple married in good faith the marriage may be deemed valid despite the revoked licence. Indicia of good faith include: the intention to have a legally binding wedding, no disqualifications due to capacity and impairment, and proof that the couple lived together after the wedding ceremony.
Notwithstanding this statutory remedy, larger consequences for estate planning arise if the couple do not satisfy the prerequisites for the remedy provided in the Marriage Act.
Firstly, an invalid marriage may present an issue for individuals who created a will after the fact, leaving bequests to their “spouses” in their wills. Due to the fact the individuals are not “spouses” as defined pursuant to the intestacy provisions of the Succession Law Reform Act (excluding Part V) or Divorce Act, it would be interesting to see how the court would treat the inheritance should the spouse who made the will die.
Pursuant to Part V of the Succession Law Reform Act, if the couple has been cohabiting continuously for a period of not less than three years, or are in a relationship of some permanence, or if they are the natural or adoptive parents of a child, they may be considered a dependant spouse (within the meaning of Part V). This may entitle the individual a fair share of the estate in this case, but being recognized as an unmarried spouse is not always certain. In any case, it would be necessary to litigate the issue, adding an unnecessary expense to the estate.
Secondly, an invalid marriage would create issues for individuals who die intestate. Pursuant to the intestacy provisions of the Succession Law Reform Act, the spouse is first entitled to the preferential share ($200,000) of an estate. If an individual dies and their marriage was not valid, the spouse that would normally be entitled may be disinherited. The result of this is that the preferential share may go to somebody who was not meant to inherit such a large portion of the estate.
Thirdly, a will is automatically revoked upon marriage. Because he did not have the authority to perform marriages, if a person was “married” by Cogan but had a pre-existing will, that will might not be found to have actually been revoked. This uncertainty creates the potential for litigation.
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For business owners, part of a comprehensive estate plan should include a succession plan for your business. It is important to start planning the succession of your business early and revisit it from time to time. This should not be a single, discrete task, but an ongoing process over time. The Canada Business Network, a government organization providing resources and information to businesses, suggests that the process of retiring or exiting from your business could take up to 5 years. Furthermore, in case of unexpected illness or death, you do not want to be left without a plan.
Your succession plan should include consideration of matters such as the vision for your business, the selection of a successor and a plan for their training, and the timeline for your transition out of the business. It could also include a plan with respect to how you might remain involved following your transition, and in what capacity.
You will need to consider whether you want to transfer the business to another person, or sell it, either to a partner, third party buyer, or even an employee. In a family business, you may wish to transfer the business to family members who have been involved in the business. This would ideally be implemented much earlier than your planned exit to allow family members to work in the business, learn it over time, and be prepared to take over when the time comes. If there are multiple family members involved, it may be difficult to decide who you wish to take over the responsibility, and may be even more difficult to communicate to those not selected. Regardless of how difficult this conversation may be, it should nonetheless be discussed sufficiently early to attempt as smooth a transition as possible.
It is also important to consider estate planning strategies specifically relating to the transition of your business. Some considerations could include how to transfer your shares to the successor in a way that minimizes tax, and whether you will be able to make use of the capital gains exemption from dispositions of Qualified Small Business Corporation shares. You may want to consider implementing an estate freeze by exchanging common shares for preferred shares, and issuing new common shares to your successors in order to freeze the value of your shares in the business. The value of future growth will then accrue to the common shares held by the successors. In this regard, and with respect to your entire succession plan, it would be wise to work with professional advisors to create and implement a tax-efficient method of transitioning your business that will work best for you.
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Yesterday’s edition of the National Post highlighted the difficulties small business owners can have with succession planning for the family business.
In one article, Christine Dobby provides statistics for agribusiness owners from a 2010 survey conducted by the Ontario branch of the Canadian Federation of Independent Business. When asked if they had a plan to sell, transfer or wind down their business in the future, an astounding 52% had no plan at all and another 31% said that they had only had informal discussions with family. Only 17% said they had a formal, written plan.
Another article by Denise Deveau illustrates that an assumption that next generation will take over the family business can be a big mistake. According to a recently released Global Family Business Survey report from PricewaterhouseCoopers, 48% of Canadian business owners plan on passing their business to the next generation, which is a significant drop from 90% in 2007. Reasons for this include a change in demographics, where business owners are living longer and having fewer children. Parents who have never taken the time to discuss a succession plan with their children are finding out that the children they assumed would step in and run the family business are not interested in doing so.
These statistics illustrate the need for proper succession planning for the family business and the importance of discussing these plans with one’s family. It can avoid a multitude of problems that would inevitably occur for family, employees and customers alike, if the founder of a family business passes away without making proper provision for the business he or she worked so hard to establish.
Sharon Davis – Click here for more information on Sharon Davis.
I recently had the opportunity to meet with a gentleman named Franco Lombardo from Vancounver B.C. who has pioneered the concept of "authentic wealth" in the context of succession planning. Franco has written two books: Life After Wealth and Money Motto both of which deal with and elaborate on his core concepts of devising strategies for individuals who want to create a meaningful personal legacy.
In Lombardo’s words: "Authentic Wealth involves seeing, understanding and releasing fears around money, and, at the same time, embracing a deeper understanding of who we are, why we are here, and how we create meaning through the choices we make every day"
Franco has founded Veritage, a company through which he consults with clients with a view towards a more holistic succession planning strategy. The concept of collaboration between a testator and his or her beneficiaries in realizing family objectives has also been explored by Ian Hull of our office and his concept of the Family Conference as a means of avoiding estate litigation.
David M. Smith