Posts tagged ‘trust’

July 14, 2015

Penny Wise or Pound Foolish?

As a litigator, I see a lot of the downside to do-it-yourself estate planning.  The recent Ontario Court of Appeal decision in Foley v. McIntyre is a good example.  At issue were certain inter vivos (ie. before death) gifts of proceeds of savings bonds by a father to one of his two children.  While there may have been other reasons for the gifts, the decision appears to indicate that the primary reason for passing on funds before death was to avoid probate and any applicable estate taxes.  Avoiding probate may have valid estate planning objectives.  However, as in this case, consideration should be given to the potential for such gifts to be attacked.  Here, the gifts were left open to a claim by the non-recipient child under the doctrine of resulting trust.  Under this doctrine, the law presumes that on a transfer of money from a parent to a child, the child holds the funds in trust for the parent.  To rebut the presumption, the donee child is required to lead evidence that indeed the parent intended to bestow a gift.  If the gifting parent is now dead, that may not be so easy.

While the trial judge and the Court of Appeal found that there was sufficient evidence to rebut the presumption of resulting trust, I suggest that there were danger signs.  For example, the donee child also held power of attorney.  As well, two of the gifts were made after the parent had suffered a second stroke and was hospitalized.  Fortunately for the donee child, the parent had provided written instructions to his financial advisor regarding the gifts and the trial judge accepted the evidence of a geriatric psychiatrist who found the parent to be competent with respect to his finances (although not with respect to personal care) and rejected the evidence of an expert saying the opposite.

What is also interesting about this case is that the parent’s will left the savings bonds to the donnee child in any event.  Had he left the bonds in his estate, the resulting trust claim could not have been raised.  I suggest that the savings in probate fees and estate taxes were more than offset by the litigation costs incurred in fighting over the gifts made to avoid probate.

Now there may have been other very good reasons for the father in this case to make the gifts that he did.  Perhaps he wanted to see the good that the money could do before he died.  If that was the case – more power to him.  If however, avoiding probate is the only reason for gifting before death, a little professional advice will go a long way.

January 4, 2014

Beware the “Pour-over Clause”

The formal requirements for a valid will can pose problems when testators seek to incorporate by reference other documents into a will. This is especially problematic where the document intended to be incorporated is changed after the date of the will. This was the issue in a recent British Columbia case.

In Kellogg Estate v. Kellogg, the Court was dealing with what is referred to as a “pour-over” clause. The purpose of the clause was to make a gift under a will to an existing trust. A husband and wife established a family trust for estate planning purposes with their three children as the primary beneficiaries. The trust included a provision that upon the death of the survivor of the husband and wife, the primary beneficiaries were to receive equal shares in the balance; one half distributed on the surviving parent’s death and one half five years later.

The husband and wife both executed wills dated the same date as the trust. Their wills included a bequest of the residue of their respective estates to the trust, to be administered in accordance with the trust, “including any amendments thereto made before my death”. The Wills also included a clause stating that if a bequest to the trust was invalid, the residue of the respective estates were to be managed and distributed under the terms of the trust as it existed immediately prior to its determination of invalidity and incorporated the trust by reference into the will.

Subsequent to the execution of the wills, the parents amended the trust, the primary change being the removal of one child as a beneficiary.

The issue for the Court was whether, firstly, incorporation of the trust into the wills of the parents generally was valid and, secondly, whether the subsequent amendment to the trust was likewise incorporated into the wills.

The Court conducted a review of the relevant law of incorporation into a will. It concluded that incorporation of a document into a will is valid if (1) the document is in existence at the time the will is made and (2) the document is beyond doubt the document referred to. The Court found that the original trust met this test and could properly be incorporated into the parents’ wills.

As for the amendment though, because it post-dated the wills, it did not meet the test for incorporation. As a result, it could only have testamentary effect if it met the requirements of the B.C. Wills Act, in particular the requirement for two witnesses (s. 4 of the Succession Law Reform Act in Ontario). The trust amendment was not witnessed.

But what of that part of the incorporation provision in the wills stating, “including any amendments thereto made before my death”. This provision was not effective to include the amendment as a testator may not reserve the ability to make gifts upon death after the date of the will without complying with the requirements of the Wills Act.

The effect of the decision is that the residue of the estates was a valid bequest to the trust as it existed before the amendment; i.e. with all three children as beneficiaries.

This decision underlies the need to always keep in mind the formality requirements for documents intended to have testamentary effect.

March 21, 2013

Can the Court “Fix” a Trust Deed?

A popular form of estate planning is the family trust. The trust allows for accumulated wealth to pass from one generation to the next in a tax efficient manner – provided the trust is actually set up to do that. What happens when, perhaps in error, it is not? Will the courts rectify the trust so as to give it the effect intended?

That was the issue for the Ontario Superior Court of Justice in the recent case of Kanji v. Lawton. A family trust was created by indenture made March 26, 1992, with Mr. Kanji as the settlor and Mr. and Mrs. Kanji as the initial trustees. Mr. Kanji transferred $5,000 in cash to the trust. The beneficiaries of the trust were Mr. and Mrs. Kanji and their children. All beneficiaries were eligible to receive income and capital from the trust. Under the terms of the trust, Mr. Kanji could remove any of the trustees and appoint substitute or additional trustees. By 2013 the trust had grown to approximately $62 million. There was a problem with the trust though.

Because Mr. Kanji was the settlor of the trust, one of the two trustees and a capital beneficiary, the combined effect of sections 75(2) and 107(4.1) of the Income Tax Act (Canada) may deny a tax-deferred distribution of assets from the trust to any trust beneficiary other than the settlor – Mr. Kanji. The 21-year rule would deem a distribution and reacquisition by the trust on March 26, 2013, triggering a substantial capital gains liability. For Mr. Kanji to distribute to himself before that date would likewise trigger a significant liability and defeat the tax efficiency benefit of a trust.

Mr. Kanji applied to the Court to “rectify” the trust to avoid this result. The Court dismissed the application.

Rectification is a remedy available to correct a mistake in a document of legal effect. With respect to a trust, the Court found that to benefit from the remedy, an applicant “must show that (i) a common, specific intention existed amongst the creators of the instrument effecting the transaction to accomplish a particular result and (ii) a mistake caused the instrument not to comport with the common intention of the parties”. The Court emphasized the need for the applicant to establish as a fact that the true intention was, at least in part, to establish the trust such that the tax liability at issue would be avoided.

The Court here was not convinced that the true intention of the trust was to avoid the tax consequences at hand. The Court noted the lack of contemporaneous evidence as to intention and in particular the lack of evidence from the lawyers acting on the creation of the trust (there is litigation pending between Mr. Kanji and his lawyers). The Court found that based on the evidence of intention available, Mr. Kanji had not established “that at the time [he] settled the Family Trust he intended to structure the Family Trust in a tax efficient manner which would allow for a tax deferred transfer of the trust’s assets to his children in the future or that a mistake was made which resulted in the trust indenture failing to give effect to that intention”.

I would not presume to comment on the issues that exist between Mr. Kanji and the lawyers acting on the establishment of the trust but it goes without saying that it is crucial that lawyers ask all the right questions in order to determine from clients precisely what they are seeking to accomplish in any estate plan.

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.