Archive for December, 2012

December 18, 2012

Gifts and Resulting Trusts – Lawyers Need to be Aware of Pitfalls

As a recent Manitoba case shows, it is important for lawyers tasked with effecting a gift of property to deal up front with a potential challenge to the gift in the form of a resulting trust claim.

In Hill v. Poquet Estate, the deceased signed a transfer of land adding the plaintiff as a joint tenant to certain real property.  The deceased and the plaintiff “were like brothers” and the consideration for the transfer was $1.  On death, the plaintiff claimed that the transfer was a gift and sought a declaration that he is entitled to be registered as owner of the property by virtue of his right of survivorship as a joint tenant.  The estate of the transferor opposed, taking the position that, as the transfer was without consideration, the plaintiff held the property as a resulting trustee for the deceased.  The Court reviewed the facts and the law regarding resulting trusts and agreed with the estate, refusing to register the transfer.

The Court set out some of the key elements of a resulting trust as stated by the Supreme Court of Canada:

  1. “A resulting trust arises when a title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original owner”;
  2. “In certain circumstances … there will be a presumption of resulting trust or presumption of advancement”;
  3. “The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended …  This is so because equity presumes bargains, not gifts”;
  4. “[T]he onus is on the transferee to rebut the presumption of a resulting trust”
  5. “In cases where the transferor is deceased and the dispute is between the transferee and a third party, the presumption of resulting trust has an additional justification.  In such cases, it is the transferee who is better placed to bring evidence about the circumstances of the transfer”.

 

In this instance, the Court found that the presumption of advancement had not been rebutted, despite the deceased having retained and instructed a lawyer to prepare the transfer and have it executed.  The Court found that the actions of the lawyer dealing with the transfer fell “well below the standard of conduct required by a solicitor looking out for the interests of his client”.   The lawyer had known the deceased for many years as both a client and an acquaintance.  The deceased attended his office and instructed him to draft up a transfer of land to add the plaintiff as a joint tenant, a power of attorney giving the plaintiff complete power to deal with the deceased’s assets and a will leaving his entire estate to the plaintiff.  The lawyer made no enquiry of or provided any advice to the deceased as to why he would do this.  When the time came to execute the documents, the lawyer acted for both the deceased and the plaintiff.  The Court found that this was “a situation which called out for the lawyer to make enquiries as to why the deceased was taking this course of action” and “was a situation that required [the deceased] to receive legal advice”.  In light of the failings of the lawyer and the lack of any other evidence to rebut the presumption of resulting trust, the Court found that beneficial title to the property rests in the estate of the deceased. 

If we presume for the moment that the intention of the deceased was to gift the property to the plaintiff, the deceased could reasonably assume that in having his lawyer take care of the matter his intentions would be carried out.  In such situations there is a clear obligation on the lawyer to take measures to ensure that a potential resulting trust claim can be properly rebutted, including assessing the transferor’s wishes and having a written intention to gift as part of the transaction.  While the Court did mention instructions to prepare a will favouring the plaintiff, there was no indication that this was done.  I suspect not as such would have gone a long way to either support the gift in the first place or otherwise result in an eventual transfer of the property to the plaintiff by will.

December 13, 2012

Percentage Trusts/Unitrusts – Guidance from the Ontario Court of Appeal

The Ontario Court of Appeal released a decision last week that provides insightful guidance with respect to the use of “percentage trusts”, also known as “unitrusts”. 

In The Canada Trust Company v. Browne (Primo Poloniato Grandchildren’s Trust), the settler, the founder of a successful food products company, set up a substantial trust in favour of his grandchildren (income beneficiaries) and his great-grandchildren (capital beneficiaries).  On consent of the beneficiaries, including the Children’s Lawyer on behalf of minor, unborn and unascertained beneficiaries, the trust was varied in 1997 to change it to a percentage trust.  As a percentage trust, the trustee was permitted a freer hand to make investments (for example in equities) in order to maximize the value of the trust for the benefit of all beneficiaries, without concern as to whether those investments were income-producing or growth-oriented.  The entitlement of income beneficiaries was altered such that they were no longer entitled to income produced by the trust, but to yearly distributions based on a percentage of a yearly rate of return of the trust as defined in the trust variation. That percentage is subject to a formula that restricts increases year over year but also provides that distributions shall not be less than those in the preceding year.  If the income-producing investments chosen by the trustee do not produce sufficient income to make the distributions, the trustee is permitted to sell equities or other capital investments in order to generate sufficient funds to make the percentage distributions to income beneficiaries.

Of course the reason for the amendment of the trust was the bullish performance of stock markets in the 1990s and the comparatively poor performance of a trust restricted to interest-based investments.  Based on expert evidence as to the likely continued upward performance of equity markets, the Court in 1997 approved the variation on the grounds that was for the benefit of all beneficiaries.

Of course what goes up sometimes comes down.  The downturn in equity markets had the effect of reducing the trust’s rate of return.  In order to maintain distributions to income beneficiaries under the percentage interest formula of the trust as varied (remember distributions could not be less than the previous year), the trustee was required to sell trust assets.  The trustee brought an application to the Court for advice and directions to clarify the trustee’s obligations, in particular “whether it retained a duty to maintain an even hand between the income and capital beneficiaries in managing Trust distributions, and therefore a discretion to stop making the prescribed percentage payments to the income beneficiaries that were eroding the value of the Trust”.

The application judge found that by the wording of the trust as varied, the trustee did not have such discretion.  The Children’s Lawyer appealed on behalf of capital beneficiaries.  The Court of Appeal upheld the lower court decision.  In essence, the Court of Appeal agreed with the application judge that the mandatory language of the trust as varied required the trustee to make the payments to income beneficiaries and permitted the sale of trust assets to do so.  After a review of the law, the Court found that the trust as varied ousted the trustee’s “even hand” obligation with respect to management of trust disbursements.  The Court rejected the capital beneficiaries’ attack of the 1997 variation as having the intent and effect of benefitting income beneficiaries at the expense of capital beneficiaries.  While it found as a fact that such was not the intent, the issue before the Court was not the intent and effect of the 1997 variation (as that had been determined in 1997), but interpretting the obligations of the trustee as a result of that variation.  The Court noted that “in a percentage trust, the trustee’s duty is not to obtain a large income yield while preserving the capital but, instead, to increase the size of the entire trust for the benefit of both classes of beneficiaries. This includes increasing the capital rather than preserving it, and therefore involves an investment strategy that may include more risk.” [my emphasis]

In obiter, the Court of Appeal did address how percentage interest trusts can be prepared in order to avoid the situation in this case.  The Court stated:

“The experience of this Trust has reinforced the need for percentage trusts to be drafted with specific safeguard mechanisms in place that will allow the trustee to review and revise the annual percentage payable to the income beneficiaries based on the changing value of the trust to ensure that one set of beneficiaries is not favoured over the other. Commentators on the percentage trust concept have recommended including a “force majeure” clause to protect against unforeseen anomalies. …

Two options would be to include a clause providing for a periodic reset by the trustee of the percentage payable to income beneficiaries, or an option for the trustee to apply to the court for advice and directions on such a reset.

It is also clear that the material provided to the court in support of a variation application seeking to convert a trust into a percentage trust must include not only upside projections but also potential downside projections that take into account a possible future market downturn. This will give the approving court the basis to include the appropriate safeguards that will ensure, to the extent possible, that the variation will in fact continue to be for the benefit of the future capital beneficiaries.”

December 10, 2012

Supreme Court of Canada hearing on life support decision starts today

See background and insight at these links.

https://stapleslaw.wordpress.com/2012/03/06/end-of-life-decisions-and-the-law-a-prelude-to-the-supreme-court-of-canadas-hearing-of-the-rasouli-appeal/ 

http://www.theglobeandmail.com/news/national/hassan-rasoulis-end-of-life-case-in-the-hands-of-the-supreme-court/article6132597/?page=2

http://news.nationalpost.com/2012/12/07/end-of-life-battles-expose-the-culture-clash-in-canadas-intensive-care-units/

http://www.theglobeandmail.com/news/national/doctors-await-supreme-court-roadmap-for-right-to-live-cases/article6144038/

December 5, 2012

Pension Benefits on Death – Who is a “spouse”?

A recent Ontario Court of Appeal decision in Carrigan v. Carrigan deals with the issue of married versus common law spouses for the purpose of entitlement to pre-retirement death benefits under the Ontario Pension Benefits Act (“PBA”).  

Section 48(1) of the PBA entitles the spouse of a pension plan member to the value of the member’s pension where the member dies before commencement of pension payments except where the member and spouse are living separate and apart on the date of death (s. 48(3)).  If the s. 48(3) exception applies, s. 48(6) provides that the benefit goes to any beneficiary named by the member.

At the time of death in this case, the deceased was legally married to A but was living separate and apart from her.  He was living with B in a common law relationship.  The deceased had designated A and their daughters as beneficiaries of the death benefit in his pension plan.  A brought an action for a declaration that she was entitled to the deceased’s pre-retirement death benefit under s. 48 of the PBA.  B opposed, claiming the right to same as a “spouse” under s. 48(1).  The trial judge found that both the plaintiff and the defendant fell within the definition of “spouse” in s. 1 of the PBA but that only one spouse can be entitled to a member’s death benefit under s. 48(1).  She interpreted s. 48(3) of the PBA as requiring that a spouse be living with the member in order to be entitled to the death benefit and that because the deceased and A were living separate and apart at the time of death, held that B was entitled to receive the death benefit because she was a spouse and was living with the deceased at the time of his death.

The Court of Appeal overturned this decision with one of three judges dissenting.  The majority held that while both A and B fell within the definition of “spouse” under s. 1 of the PBA, the word “spouse” in s. 48 must always refer to the legally married spouse, because it makes no sense under s. 48(3) to conceive of a common law spouse living separate and apart from the member.  When s. 48(1) does not apply, there is no provision that the “spouse” of the member is entitled to the death benefit.  As there is no spousal entitlement, the member’s designated beneficiary was therefore entitled to the death benefit under s. 48(6), with the result that A and her two daughters were entitled to the death benefit as the deceased’s designated beneficiaries.

Justice LaForme dissented, holding that, as the definition of “spouse” in the PBA includes both legally married and common law spouses, to read “spouse” as having only one meaning in s. 48(3) (ie. a married spouse) would be to give “spouse” a different and more restrictive meaning under s. 48(3) than under s. 1.  He held that while A qualified as a spouse on the date of death, she was living separate and apart from the deceased on the relevant date.  As a result, s. 48(1) did not apply to her.   B was also a spouse on the date of death, and was not living separate and apart from the deceased.  Accordingly, B was not disqualified from receiving the death benefit by virtue of s. 48(3).

It is not clear if this result was intended (or even contemplated) by the Legislature.  However, if the intention is that the benefit go to a common law spouse over a named beneficiary where a married spouse is otherwise not entitled under the PBA, an ammendment to the legislation will be required.