Trusts are generally divided into two categories; “inter vivos” or “testamentary” trusts. Inter vivos trusts are broadly defined as trusts that are established by a settlor while they are still alive, typically pursuant to a deed of trust, while testamentary trusts are established in the terms of a Will or Codicil. Generally speaking there is no overlap between an individual’s Will and any inter vivos trust, with any inter vivos trust existing separate and apart from the settlor’s “estate”. But does this have to be the case? Could you theoretically, for example, leave a bequest in a Will to an inter vivos trust that you previously established, thereby potentially increasing the assets governed by the trust upon your death, or must a trust which governs estate assets be a “testamentary trust” established by the Will? The short answer is “it depends”, although any individual considering such a bequest should proceed with extreme caution.
A clause in a Will that provides for the potential distribution of estate assets to a separate inter vivos trust is often referred to as a “pour over” clause, insofar as the assets of the estate are said to “pour over” into the separate trust. The availability and use of “pour over” clauses in Ontario is somewhat problematic.
The fundamental issue with the use of “pour over” clauses that allow a bequest to be made to a trust is that the formalities that are required to make or amend a trust are much lower than the formalities that are required to establish a Will, with trusts often containing provisions that will allow for their unilateral amendment or revocation after their establishments. The statutes which establish the parameters that are required for a Will to be valid are very strict, with a Will only being able to be later amended or altered if it too meets very strict criteria. The potential concern in allowing a distribution from a Will to a separate trust that can easily be amended after the execution of the Will is that it could create the scenario in which an estate plan could be altered after the Will was signed in a way that would not meet the strict formal requirements that would otherwise be required for a Will to be altered or amended.
In Ontario the formalities required for a Will to be valid is established by section 4(1) of the Succession Law Reform Act. A Will that has been signed in accordance with the formal requirements of section 4(1) can only be altered or amended by a Codicil that itself has been signed in accordance with the formal requirements of section 4(1), or if the alterations to the Will meet the requirements of section 18 of the Succession Law Reform Act. Unlike alterations and/or amendments to a Will, an alteration or amendment to a trust does not need to meet any formal statutory requirements for it to be valid, with the only requirements being those stipulated in the trust document itself and/or under the rules in Saunders v. Vautier. As a result, an inter vivos trust to which a bequest was directed using a “pour over” clause could theoretically be changed numerous times after the signing of the Will either with or without the involvement of the testator, thereby bringing into question whether the bequest actually represents the deceased’s testamentary intentions at the time the Will was signed.
In Quinn Estate v. Rydland, 2019 BCCA 91, the British Columbia Court of Appeal upheld the lower British Columbia Supreme Court decision, 2018 BCSC 365, which found that a “pour over” clause which purported to distribute certain estate assets to a trust that was settled by the Deceased during his lifetime was inoperable, with the funds that were to be distributed to the trust instead being distributed on an intestacy. In coming to such a decision the court appears to place great emphasis on the fact the trust in question could be amended unilaterally after the fact and in fact was amended in such a fashion after the execution of the Will.
The court in Quinn Estate provides an excellent summary of the considerations to make when determining whether a “pour over” clause can be upheld, including the concepts of “facts of independent significance” and “incorporation by reference”. I will discuss the concepts of “facts of independent significance” and “incorporation by reference” as they relate to pour over clauses in my remaining blogs this week.
Thank you for reading.
I recently had a chance to attend a very interesting continuing legal education program organized by the Ontario Bar Association called: “Rights and Limitations on an Attorney under a Power of Attorney”.
The program was chaired by Natalia Angelini of our office and Kimberly A. Whaley of WEL Partners. Professor Albert Oosterhoff, Professor David Freedman, Thomas Grozinger and John Poyser presented their views on various questions surrounding beneficiary designations.
An interesting debate took place at the end of the program on the question of whether beneficiary designations are testamentary instruments.
Professor Oosterhoff presented his view that, beneficiary designations are not in fact testamentary acts and should therefore be considered inter vivos acts. One of the reasons cited by Professor Oosterhoff in this regard that I found compelling is the fact that a beneficiary designation does not have to comply with the formalities required of a Will. The fact is that a beneficiary designation is often executed in passing and the same considerations do not apply to such a decision as typically would apply to the making of a Will.
Then again, a testator can make a handwritten Will in passing which will be just as valid as if made in accordance with the formal requirements. However, the fact that it is made quickly and in passing does not necessarily mean that it is not a valid Will.
Another reason cited by Professor Oosterhoff in support of his position was that, in his opinion, beneficiary designations take effect when they are signed. By way of a further explanation, Professor Oosterhoff clarified that a beneficiary designation is not dependent upon the designator’s death for its “vigour and effect”, despite the fact that performance does not actually take place until the designator’s death.
This opinion was not universally shared by the panel and some of the attendees of the program. One significant issue that was raised was that if beneficiary designations are indeed not testamentary acts, there could be potential tax consequences necessitating legislative reform.
It will certainly be interesting to see whether a new case or legislative reform will shed some light on this question. I can certainly see the appeal and the logic behind Professor Oosterhoff’s view.
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It is not uncommon for the lawyer who drafted a testator’s will or codicil to subsequently be retained by the Estate Trustees after the testator’s death to assist with the administration of the estate. The rationale behind the drafting lawyer being retained to assist with the administration of the estate appears fairly self-evident, for as the drafting lawyer likely has an intimate knowledge of the testator’s estate plan and assets they may be in a better position than most to assist with the administration of the estate.
While retaining the drafting lawyer to assist with the administration of the estate is fairly uncontroversial in most situations, circumstances could become more complicated if there has been a challenge to the validity of the testamentary document prepared by the drafting lawyer. If a proceeding has been commenced challenging the validity of the testamentary document, there is an extremely high likelihood that the drafting lawyer’s notes and records will be produced as evidence, and that the drafting lawyer will be called as a non-party witness as part of the discovery process. If the matter should proceed all the way to trial, there is also an extremely high likelihood that the drafting lawyer would be called as a witness at trial. As the drafting lawyer would personally have a role to play in any court process challenging the validity of the will, questions emerge regarding whether it would be proper for the drafting lawyer to continue to represent any party in the will challenge, or would doing so place the drafting lawyer in a conflict of interest?
Rule 3.4-1 of the Law Society of Ontario’s Rules of Professional Conduct provides that a lawyer shall not act or continue to act where there is a conflict of interest. In the case of a drafting lawyer representing a party in a will challenge for a will that they prepared, an argument could be raised that the drafting lawyer is in an inherent position of conflict, as the drafting lawyer may be unable to look out for the best interests of their client while at the same time looking out for their own interests when being called as a witness or producing their file. There is also the potentially awkward situation of the drafting lawyer having to call themselves as a witness, and the associated logistical quagmire of how the lawyer would put questions to themselves.
The issue of whether a drafting lawyer would be in a conflict of interest in representing a party in a will challenge was dealt with in Dale v. Prentice, 2015 ONSC 1611. In such a decision, the party challenging the validity of the will brought a motion to remove the drafting lawyer as the lawyer of record for the propounder of the will, alleging they were in a conflict of interest. The court ultimately agreed that the drafting lawyer was in a conflict of interest, and ordered that the drafting lawyer be removed as the lawyer of record. In coming to such a conclusion, the court states:
“There is a significant likelihood of a real conflict arising. Counsel for the estate is propounding a Will prepared by his office. The preparation and execution of Wills are legal services, reserved to those who are properly licensed to practise law. Counsel’s ability to objectively and independently assess the evidence will necessarily be affected by his interest in having his firm’s legal services found to have been properly provided.” [emphasis added]
Decisions such as Dale v. Prentice suggest that a lawyer may be unable to represent any party in a will challenge for a will that was prepared by their office as they may be in a conflict of interest. Should the circumstance arise where the drafting lawyer is retained to assist with the administration of the estate, and subsequent to being retained someone challenges the validity of the Will, it may be in the best interest of all parties for the drafting lawyer to indicate that they are no longer able to act in the matter due to the potential conflict, and suggest to their clients that they retain a new lawyer to represent them in the will challenge.
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The general rule, one that most people are probably familiar with when they think of a Will, is that the testator has to have the requisite capacity in order to be able to execute it. But what does that mean?
Generally, it means that a person should be of sound mind and understanding and have sufficient capacity to appreciate the various dispositions of property that would be put into effect with his or her execution of the Will. In other words, the testator must:
(1) understand that they are giving their property to one or more objects of his or her regard;
(2) have the capacity to comprehend the extent of their property and the nature of the claims of others to whom they are giving nothing under the Will.
In the case of a deceased who committed suicide, a question that may arise is whether a person who is about to commit suicide has the appropriate testamentary capacity to be able to execute a Will?
In that regard, it is important to remember that the onus is on the person who is propounding the Will – in other words applying to the court for an order that the Will is valid. In the usual course, there is certainly no presumption against the testamentary capacity of a testator. Indeed, it is quite the opposite. However, in cases where a proposition is made that a death (suicide) note is the last valid will and testament of a testator, it is more likely that someone may object. That is especially the case where an expected beneficiary is disinherited under such a circumstance.
As soon as capacity is called into question, the onus lies on the party propounding the Will to affirm testamentary capacity.
Suicide, in itself, does not equate to testamentary incapacity – although it is a circumstance that may be considered. In fact, a testator may have testamentary capacity even if they are not of entirely sound mind. That means that prior to committing suicide, a person can very well have testamentary capacity. If that is the case, then a death note can be considered a Holograph Will, which in Ontario, in accordance with section 6 of the Succession Law Reform Act, has the following requirements in order to be valid:
(1) It must be entirely in the testator’s hand writing; and
(2) It must be signed by the testator.
There is no requirement for witnesses in the case of a Holograph Will and it must be that the testator intended to dispose of their property after death.
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Our blog has previously discussed the importance of original testamentary documents at length. Typically, an original will is required in order to apply for a Certificate of Appointment of Estate Trustee With a Will. If an original will cannot be located, it may be presumed that it was physically destroyed, and therefore revoked, by the testator. Alternatively, a copy of a will may be admitted to probate upon the filing of a lost will application. However, this remedy is not a fix-all that can be used in all situations in which an original will cannot be located and, even when successful, will result in additional legal fees and delays in the administration of the estate.
Certain provisions within the Criminal Code of Canada criminalize the theft and destruction of another person’s testamentary instruments in recognition of the importance of these documents. At Section 2, the Criminal Code defines a “testamentary instrument” as including “any will, codicil or other testamentary writing or appointment, during the life of the testator whose testamentary disposition it purports to be and after his death, whether it relates to real or personal property or to both”.
Typically, the theft of personal property valued at less than $5,000.00 is a summary offence and can result in up to two years of imprisonment. Where stolen property meets the definition of a testamentary instrument, the seriousness of the crime is elevated to an indictable offence, punishable by up to ten years in prison (section 334(a) of the Criminal Code). The possession of a stolen testamentary instrument is also a crime in Canada. The Criminal Code prohibits possession of property obtained by a criminal act and specifically identifies the possession of a stolen testamentary instrument as an indictable offence with a penalty of up to ten years of prison (sections 354, 355(a)).
Similarly, the destruction, concealment, cancellation, or obliteration of a testamentary instrument “for a fraudulent purpose” is an indictable offence and a conviction may result in up to ten years of imprisonment (section 340). The destruction of a testamentary instrument as a result of an act of mischief is also an indictable offence , punishable by up to ten years in prison (section 430(3)).
The provisions of the Criminal Code outlined above illustrate the significance of the original copy of a last wills and testaments, codicils, and other testamentary documents in Canada and the lengths that the law will go to in protecting the sanctity of these original documents that are typically required in order to administer an estate in the way intended by the testator.
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I recently tweeted this article from the Financial Post, which discusses different methods of charitable giving and the tax benefits associated with each method.
With respect to inter vivos charitable gifts, the methods include:
- A one-time gift using cash, cheque or credit card;
- Gifting publicly traded securities;
- A one-time gift using flow-through shares; and
- Gifting real estate or private shares.
One-time gifts using cash, cheque or credit card, which are familiar to most individuals, are the most common type of gift and are often gifts of smaller amounts. The other type of one-time gift, which makes more sense for larger gifts, is a gift of “flow-through shares”. These are a particular type of stock involved in materials or energy exploration that qualify for significant government credits. This option is better for individuals comfortable with advanced tax strategies and high taxable incomes. The two remaining inter vivos methods of gifting publicly traded securities, private shares, or real estate, are best for large gifts and result in tax benefits with respect to capital gains.
With respect to testamentary giving, the article discusses leaving money in a will, leaving money through an insurance policy, and donating RRSPs and RRIFs. Gifting money to charities via a bequest in a will is familiar to many individuals. However, there are often more tax-efficient ways to give, since money in your estate has been fully taxed and probated along the way.
The other methods of testamentary giving discussed are less common. Leaving money through an insurance policy involves paying premiums on a policy for which a charity is the beneficiary, and receiving a tax receipt on the payment of that premium. This method is said to often deliver a higher rate of return than investing and leaving money to a charity in your will. It also has the benefit of providing certainty with respect to the amount you will be donating to the charity. Donating your RRSPs or RRIFs has a benefit in that, often, the taxes on an RRSP or RRIF may be the largest tax liability on an estate. By donating the balance of the RRSPs or RRIFs, you can effectively use a charitable gift to cancel out the tax.
If charitable giving is something that you consider important, consider gifting in a tax-efficient way so as to gain a benefit yourself, and to provide even more of a benefit to your chosen charity.
Thanks for reading.
It is commonly understood that Canadian political parties are subject to rigorous rules respecting contributions. Failure to appreciate these rules presents a potential pitfall for the estates practitioner.
Under s.405(1) of the Canada Elections Act, "No individual shall make contributions that exceed: (a) $1,000 in total in any calendar year to a particular registered party [and] (b) registered associations, nomination contestants and candidates of a particular registered party; (c) $1,000 in total to a candidate for a particular election who is not the candidate of a registered party; and (d) $1,000 in total to the leadership contestants in a particular leadership contest."
Subsection 405(2) states that subsection (1) "does not apply to contributions that are made by way of an unconditional, non-discretionary testamentary disposition (emphasis added)."
Accordingly, if a client wishes to leave a gift (i.e. a contribution) to a political party in his or her Will, the parameters of the Act need to be considered by the will drafter to see that the contribution is accepted. A specific legacy would seem the best bet. Moreover, the Act appears to provide no latitude to allow acceptance of testamentary contributions made in settlement of litigation or potential litigation. If a contribution to a political party is a term of settlement of an estate dispute where all concerned agree that such accorded with the intentions of the deceased (yet were never formalized), such contribution may not be accepted.
David M. Smith – Click here to learn more about David Smith.
The sudden death of Michael Jackson has sent a shock-wave of sadness across the globe. I expect it will be some time before you can tune in to various media without seeing coverage on it.
I find myself drawn in to the discussion, which one of my colleagues also blogged on last week. His commentary focused on the expected complex administration of Jackson’s estate, given both his sizeable assets and debts. This blog focuses on one aspect of the human element of the tragedy, sparked by Jackson’s Will.
As noted in a recent New York Times Article, in his Will Diana Ross is appointed as the guardian for Jackson’s children if his mother is no longer willing or able to fulfill that role.
In Ontario, a custody or guardianship appointment by Will is not determinative of the issue. It only has a temporary effect, in that any appointment for custody or guardianship expires ninety-days after such appointment becomes effective (i.e. ninety-days from the date of death in this case) (see section 61(7) of the Children’s Law Reform Act).
However, if the appointee applies to the court for custody or guardianship within the ninety-day period, the appointment expires when the application is disposed of. While each case is usually fact-specific, I would expect that a testator’s wishes set out in his/her Will is a factor a court would give significant weight to when considering such an application.
In Jackson’s case this issue is already a live one, with potentially several people vying for custody and/or guardianship. It will be interesting to see who ends up being the primary caregiver(s) of his young children.
Have a great day,
I recently learned that an old neighbour of mine was residing in a long-term care facility and I decided to visit him. As a child, I remember my neighbour would often come out to join us in a pick up game of baseball or street-hockey. Having known my neighbour to be a strong and vibrant individual, and despite having prepared myself, it was nonetheless disarming for me to see him in need of assistance and so dependent on others. Although, in my practice, I have cause to consider the issue of capacity almost daily, this experience caused me to reflect on the issue in a much more personal fashion.
Lawyers, particularly in our area of practice, are often required to consider capacity issues and it is easy to allow our personal views to affect our analysis. For instance, if my neighbour left his entire estate equally among his three children, in most circumstances we would presume he had capacity. However, if he left his estate to his caregiver, to the exclusion of his children, most of us would be inclined to conclude that he had either acted for want of capacity or was perhaps coerced to make a Will while vulnerable to undue influence.
People do not typically become incapacitated overnight, except in circumstances where a catastrophic event has occurred. Capacity to make a Will has been described as knowing and understanding the nature and effect of your dispositions and understanding who would be the natural persons to enjoy the bounty of their estate.
In making this determination, if there is any doubt regarding a client’s capacity it is surely advisable to obtain the appropriate capacity assessment in the circumstances.
Have a great week!
Listen to Developments in Will Changes.
This week on Hull on Estates, Ian and Suzana discuss developments in will changes. They reference cases from Key Developments in Estates and Trusts Law in Ontario ed. 2008.