Corporations and Estates – What happens when a Will gifts an asset that is actually corporately owned?
The use of privately held corporations to manage an individual’s assets or business interests seems to be an increasingly common strategy and tool. Although the use of privately held corporations offer a number of potential advantages to the individual both during their lifetime and as part of their estate planning, it does raise a number of novel issues for the administration of the estate which may not exist if these assets had been directly owned by the individual. Such potential issues manifested themselves before the Ontario Court of Appeal in the relatively recent decision of Trezzi v. Trezzi, 2019 ONCA 978, where the court was asked to determine the potential validity of a bequest in a Will of property that was not directly owned by the testator personally but rather owned by them through a wholly owned private corporation.
As privately held corporations are often wholly owned by a single individual owner the individual in question would be forgiven for thinking that any assets that are actually owned by the corporation are their own. Such a misconception could carry with it some significant legal issues however, as it ignores the important fact that at law the corporation and the individual owner are two distinctly separate legal entities, and that although the individual owner of the corporation can exercise almost absolute control over the corporation as the sole shareholder, and could through such control likely direct the corporation to take any action regarding any asset the corporation may own (subject to any obligations of the corporation), they do not personally “own” any asset that is in fact owned by the corporation. Such a distinction is potentially important to keep in mind when a person who owns assets through a private corporation is creating their estate plan, as they should be mindful of whether any specific asset which they wish to bequest is owned by them personally or through the corporation.
In Trezzi the testator left a bequest in their Will to one his children of all equipment and chattels that were owned by a construction company that was wholly owned by the testator. This bequest was challenged by certain of the residuary beneficiaries, who argued that as the equipment and chattels in question were not actually directly owned by the testator, but rather the corporation, the testator’s bequest of such items had failed and that the items in question should instead continue to form part of the corporation and be distributed in accordance with the residue clause to their potential benefit.
The Court of Appeal in Trezzi ultimately upheld the bequest in question; however, in doing so, noted that the language was potentially problematic and encouraged counsel to be more careful when drafting in similar circumstances (even including potential precedent language to follow from the Annotated Will program). In upholding the bequest the Court of Appeal was in effect required to do an interpretation application for the Will, noting that they placed themselves in the position of the testator and considered what his intention would have been when including the provision in question. The court ultimately concluded that it would have been the testator’s intention with such a provision that the executor was to wind up the corporation in question, with the assets being distributed to the beneficiary in question as part of such a process. In coming to such a conclusion the court states:
“While it is true that Peter, as the sole shareholder of Trezzi Construction, did not directly own the corporation’s assets, that does not complete the analysis. In substance, Peter’s shares in Trezzi Construction became part of the estate, and Peter effectively directed his executors to wind-up the company and to distribute its assets in accordance with his will, even though he did not own those assets directly. As already noted, the key question thus boils down to whether this was indeed Peter’s subjective intention in his will…” [emphasis added]
Although cases like Trezzi show that under certain circumstances a bequest of assets which are not directly owned by the testator but rather through a corporation can be upheld such a result cannot be guaranteed, as the Court of Appeal in Trezzi was required to resort to the rules of construction and place themselves in the position of the testator to uphold the bequest in question. As a result, a testator would be wise to take extra care when dealing with an estate plan that includes the potential bequest of assets that are corporately owned to ensure that the ownership of such assets is properly described and the executor is provided with any necessary authority and direction to deal with the corporately held assets on behalf of the estate.
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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 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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The Canadian government, after receiving a four month extension for passage of Bill C-14, which enables medically assisted suicide, will not meet today’s deadline set out by the Supreme Court of Canada. The Bill has passed its second reading in the Senate and has obtained agreement in principle. Yet, after this vote, the Senate adjourned its hearing until June 7th. As previously blogged, the Bill is a result of the Supreme Court of Canada’s decision in Carter v. Canada (Attorney General) 2015 SCC 5, where the Supreme Court ruled that the blanket criminal code provisions prohibiting physician assisted suicide were unconstitutional. The federal government was initially given a year’s time to put in place remedial legislation, and recently received a four month extension to this deadline. In granting the extension, the majority of the Court stated that it would be unfair to those who already qualify based on Carter to delay the legislation any longer.
Despite this, as of the end of today, physicians and patients will be left in legal limbo. While guidelines have been provided to doctors across the provinces, these could be the cause of significant variation in medical practice.
There are already concerns about the constitutional validity of the proposed legislation. The Alberta Court of Appeal in Canada (Attorney General) v. F. (E.), 2016 ABCA 155 considered the Supreme Court’s guidance in Carter and found that Carter did not limit applications for physician assisted suicide to only those who were terminally ill. It rejected the Attorney General for Canada’s argument that these limits could be inferred from the language in the Carter decision.
The Alberta Court of Appeal found that any attempt to read restrictions into the Carter decision would have to take into account the balance of values struck in Carter: autonomy and dignity of the applicant on one hand, and the sanctity of life and protection of the vulnerable on the other. The Court found that because of these important interests, it would be inappropriate to exclude, by inference, those who meet the criteria in Carter, and were never expressly excluded by the Supreme Court’s decision. The Court of Appeal also found that the Supreme Court did not exclude mental illnesses as the basis for application.
The Bill, as it is currently written, appears only to allow those who are terminally ill to apply. It will be interesting to see whether at this late hour any revisions will be made to the legislation to avoid the obvious challenge to its constitutional validity. Any such revisions will only increase the delay and uncertainty that will exist as of the end of today.
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An interesting decision was recently released from the Brampton Superior Court of Justice which considered whether the Court’s rectification of a will in a prior proceeding precludes the Court from requiring that same will to be proven in solemn form on a subsequent motion.
The details of the initial rectification proceeding in McLaughlin v. McLaughlin, 2014 ONSC 3161, have been extensively covered by our blog here and here (bonus points to our dedicated readership if you recall the comments of our very own Jonathon Kappy in the Law Times on this subject). Ultimately, Justice Lemon rectified the secondary will of Elizabeth Anne McLaughlin such that the revocation clause therein would not have the effect of nullifying the validity of the primary will that was executed on the same day, in addition to rectifying various other drafting errors. A finding was made after a full hearing that neither the testatrix, nor the drafting solicitor, could have failed to detect the patent errors in the secondary will if they read the will.
Despite the Applicant’s success in the rectification proceeding, the issue of his sibling’s Notice of Objection to the probate of the primary will remained before Justice Price in McLaughlin v. McLaughlin, 2015 ONSC 4230, and he was left to consider the preliminary issue of whether Justice Lemon’s prior ruling precluded the Court from requiring both wills to be proven in solemn form. Given that there were no issues with the testatrix’ testamentary capacity, the issue before Justice Price in respect of the validity of the secondary will was whether the testatrix understood and approved of its contents in light of the prior finding that she could not have read the secondary will on a balance of probabilities.
After a review of the jurisprudence on the doctrine of rectification in Robinson Estate v. Rondel, Justice Price concluded as follows,
“Rectification is concerned with correcting the drafting errors of the will, whereas the proving of a will in solemn form concerns the validity of the will. These issues are substantively different, and I am therefore satisfied that I would not, in effect, be reversing Lemon J.’s decision as to rectification of the secondary will should I find that will to be invalid.”
While Justice Price found that the Court was not precluded from considering the validity of the secondary will subsequent to its rectification, Justice Price ultimately found that the secondary will was invalid on the basis of Justice Lemon’s finding that the testatrix did not read the will nor did she have knowledge and approval of its contents.
The formalities in the Succession Law Reform Act are strict and unforgiving. Case law suggests that Ontario courts have no discretion to depart from compliance with the SLRA’s requirements in determining the due execution and formal validity of a Will and its provisions.
Handwritten alterations made subsequent to the formal execution of a Will are valid in only two situations:
1. If the alterations are signed by testator in the presence of two subscribing witnesses who also sign near the changes or sign at the end of a memorandum elsewhere in the Will that refers to the changes (s. 18(2) SLRA); OR
2. If the alterations constitute a valid Holograph Will or Codicil i.e. they must be wholly in the testator’s handwriting and must be signed by the Testator (s. 6 SLRA).
In order to be a valid Holograph Codicil the markings on the Will must:
• Be capable of standing on their own without reference to the printed text around them; AND
• Indicate a firm testamentary intent.
Any changes that completely obliterate portions of the Will, such that the provisions cannot be discerned from an inspection on the face of the document without resort to artificial means or extrinsic evidence, will be effective to remove said portions from the Will.
Sharon Davis – Click here for more information on Sharon Davis.
The requirements of formal validity have, on occasion, bedeviled the Courts. Presented with overwhelming evidence of testamentary intent, the Court’s hands may nonetheless be tied by uncompromising legislative requirements.
In Nova Scotia, the legislature proclaimed (on August 18, 2008) an amendment finally permitting the making of Holograph Wills. Moreover, the amendment also permits Wills to be admitted to probate that do not meet the requirements of formal validity if the Court is satisfied that a flawed document nonetheless reflects the testamentary intentions of the testator.
Lawyer’s Weekly just reported on MacDonald v. MacDonald, a decision out of the Nova Scotia Supreme Court. In this case, the testator made a Will entirely in her own handwriting but left it unsigned. It was, however, witnessed and the two witnesses gave evidence that the testator had attested to it as her last Will in their presence. The testamentary document before the Court in MacDonald therefore fell within both branches of the amendment to the provincial statute. However, the Will was not admitted to probate because it was made prior to the proclamation of the amendment to the Wills Act. Unlike Ontario’s Succession Law Reform Act which provided for retroactivity to 1978, the Nova Scotia amendment did not have a similar clause.
David Morgan Smith
David Morgan Smith – Click here for more information on David Smith.
Listen to The Business of Being an Estate Trustee.
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss the business side of being an Estate Trustee and talk about what to do with assets.