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Your pension not only provides you with post-retirement income, but it also provides financial security for your loved ones after your death. As a pension contributor, it is important to understand your legal entitlements when designating pension benefits.

Do Pension Benefits Form Part of My Estate?

If a beneficiary designation has been made through a pension plan, the benefits do not form part of one’s estate. This is beneficial because the pension funds will not be subject to probate and will not be used by the executor to pay any debts or liabilities.

Who Can I Designate as My Beneficiary?

The default under BC law is that a spouse is deemed to be the sole beneficiary of a deceased contributor, unless:

1. the deceased contributor does not have a spouse at the time of death; or
2. the spouse signs a waiver withdrawing their entitlement to the pension benefits.

Every pension plan is different, and it is important to confirm your entitlement to name alternate beneficiaries with your pension plan administrator. However, if a spouse waives their entitlement, the benefits may be paid to other listed beneficiaries (e.g., children). If there are no listed beneficiaries, the benefits may be paid to the personal representative (e.g., executor) of a deceased contributor’s estate.

What is the Definition of a Spouse?

Under BC law, two people become spouses if they:

1. are legally married to each other; or
2. have not been living separate and apart from each other and are living in a “marriage like” relationship for a period of at least 2 years.

Two people cease being spouses if:

1. they become divorced; or
2. in the case of a “marriage like” relationship, one or both people terminate the relationship.

In circumstances where a common law spouse is claiming entitlement under the deceased contributor’s pension, the common law spouse must provide proof that the relationship was “marriage like” in nature. Such evidence must be provided in satisfaction to the administrator of the pension plan.  The courts have taken a broad approach on what can be considered a marriage like relationship and have suggested that evidence of such a relationship should be both subjective and objective. Evidence may include but not be limited to, proof of joint finances, joint ownership of property, or whether the couple conducted themselves as a married couple in social and public settings.

How Can a Spouse Waive Entitlement to a Pension?

If a spouse is willing to give up their entitlement to a contributor’s pension, the spouse wanting to waive entitlement must sign a waiver in accordance with section 80(4) of the PBSA. The waiver must not have been signed more than 90 days before the commencement date of the pension plan, and must be signed freely, voluntarily, absent any duress and the spouse must understand the legal consequences of waiving such entitlement. If there remains evidence of duress, or evidence of a spouse not understanding the legal consequences of signing the waiver, the validity of the waiver may be challenged and found invalid.

How to Name My Children as Beneficiaries?

As mentioned, you may name your children as beneficiaries if you do not have a spouse, your spouse predeceases you, or your spouse has waived their entitlement. However, if any of your children are under the age of majority it is advised to consult with an experienced lawyer to discuss options of creating and naming a trust as your beneficiary to have a trustee distribute and manage your pension benefits on behalf of your minor children.

Takeaway

The legislative restrictions imposed on pension benefits can often be difficult to understand or may even be overlooked by many pension contributors. Designating beneficiaries and providing financial security for your children requires special thought and planning to ensure your wishes are fulfilled while adhering to the legislative restrictions. If you are a pension contributor and have not designated a beneficiary or would like to designate your children as beneficiaries, contact your pension administrator who will guide you through the process.

If you have questions about designating your pension benefits, our team can help you consider your options, and create a strategy that is right for you. Contact our Wills & Estate Team – we’re here to help.

Excessive Spending under a Power of Attorney

If you have been granted Power of Attorney, it is important for you to understand the duties and obligations that come with your role. In a Power of Attorney document, an adult (sometimes called the “donor”) grants another person (known as the “attorney”) the authority to manage the donor’s legal and financial affairs. This means the attorney can make decisions about how and when to spend the donor’s money. These decisions must be guided by the various duties that the attorney owes to the donor.

An attorney owes fiduciary duties to the donor. These obligations come with the ability of the attorney to deal with the donor’s legal and financial affairs. Fiduciary law requires an attorney to act in good faith and in the best interests of the donor, and to exercise a degree of diligence and care.

What about in BC Law?

The law in B.C. states that an attorney must, to a reasonable extent, give priority to meeting the personal and health care needs of the donor [see Power of Attorney Act, RSBC 1996, c 370, s. 19(3)(a)].

Our BC Courts have recently considered the question of “how much is too much?” when it comes to spending by the attorney.  In Putman v. Putman, 2021 BCSC 1700, a brother and sister, David and Linda, were jointly appointed as attorneys over their mother. David and Linda could not agree on the appropriate long-term care arrangements for their mother, who had Alzheimer’s and other medical conditions.

Linda had placed their mother in a care home that they had toured and selected before her mother’s illness. Linda also arranged for additional care and support from a companion service. David disagreed with Linda’s decisions, arguing that she was not acting in their mother’s best interests and accusing her of “excessive spending”.

The Court found that Linda had not breached her duties and that the expenses incurred for her mother’s care were appropriate in the circumstances. An attorney must prioritize the donor’s personal care and health care needs to a reasonable extent. Linda and David’s mother was a wealthy woman who had the financial means to pay for the level of care she received. There was also evidence that the additional care and support improved the mother’s quality of life.

Questions to Consider

Using the Putman case as a guide, when contemplating whether costs associated with health care are appropriate, it may be helpful to ask the following questions:

1. Does the type of health care serve the best interests of the adult?
2. Does the type of health care increase or decrease the adult’s well-being and quality of life?
3. Does the adult have the financial means to afford the type of health care?
4. Are there medical support for or opinions agreeing or disagreeing with the type of health care?

If you have questions about planning for incapacity, or about fulfilling your obligations under a Power of Attorney, contact our Wills & Estate Team – we’re here to help.

What is Conditional Gifting?

When creating an estate plan, one of the Will-maker’s most significant decisions is choosing who receives their assets and property. Not only can the Will-maker select their beneficiaries, but they can also go a step further and require that the beneficiary meet certain conditions in order to receive their gift. This is known as conditional gifting.

What are some examples of Conditional Gifting?

A Will-maker can attach conditions or stipulations (usually, doing or refraining from doing something) that must be fulfilled in order for the beneficiary to qualify for the gift. If the beneficiary does not meet the conditions, an alternate beneficiary will take the gift. These are some examples of gifts that have been made conditional:

• • John leaves his prized Corvette to his granddaughter as long as she graduates from college before turning 30; otherwise, the car will go to his son instead.
  • Eileen leaves $50,000 to her nephew if he is living in France at the time of her death; otherwise, the money will go to her children.
  • A 1949 Will gave the Will-maker’s daughter all future income generated from a farm, provided that the daughter did not “smoke or drink intoxicating liquor”; otherwise, the income would go to her grandchildren.

There are limits to a Will-maker’s ability to impose conditions on a gift.

The Courts will not uphold conditional gifts that are illegal, uncertain or against public policy.

A condition must be written in clear terms so that your executor knows whether or not the requirements for the gift have been met. (For example, the condition against “intoxicating liquors” might not be upheld today, since it is not entirely clear what could fall into that category, nor how the executor would determine the condition had been fulfilled).

A Court will also strike down conditions that prevent or obstruct a beneficiary from exercising their legal rights, or that place restraints on marriage, religious beliefs, or that are discriminatory based on race or gender. The Courts would declare these gifts to be void, despite the Will-maker’s intentions. These are some examples of gifts that we struck down by the Courts as a matter of public policy:

•  A gift to a Will-maker’s son, on the condition that the son was not married to a specific person whom the Will-maker disapproved of, or a gift to a daughter on the condition she was not married to someone of a certain religion.
• A gift to a child, on the condition that the child not live with a certain parent.
• A gift which required a beneficiary to remain in a “mainstream Christian church” in order to receive his inheritance.
• A bursary created for students who must be Caucasian, single and heterosexual and not feminist in order to receive the award.

Takeaways

Because of the many legal issues that these types of gifts can create, Will-makers should obtain legal advice prior to including these gifts in their Wills, and the terms of the gifts should be carefully drafted by a lawyer, to ensure there are no issues with interpretation nor enforceability.

If you have questions about your estate plan or would like to talk to a lawyer about how your wishes can be put into effect, contact Leah Card or a member of our Wills & Estates Team – we’re here to help.

Alter Ego vs Joint Spousal Trust Planning

What is an Alter Ego Trust?

An Alter Ego Trust is a type of trust allowed under the Income Tax Act (Canada) (the “Act”). By setting up this trust, any assets you transfer into the trust are no longer held by you personally. Rather, the trust holds the assets and, typically, you manage the assets as a trustee on your own behalf, for your sole benefit, for as long as you are living. You also designate who receives the trust assets after your death. To set up this trust, you must be 65 years of age or older and a Canadian resident.

What is a Joint Spousal Trust?

A Joint Spousal Trust is a trust where assets are transferred into the trust, and either one or both spouses are entitled to receive all income and capital of the trust prior to the death of the surviving spouse. To set up this trust, one of the spouses must be 65 years of age or older and a Canadian resident.

Advantages to these forms of Trusts

There are numerous advantages to setting up an Alter Ego Trust or Joint Spousal Trust (the following is not an exhaustive list):

1. Ease of Control: You can handle your own trust affairs by appointing yourself as the trustee. You may also provide a replacement trustee in the event that you become incapacitated. This addresses succession/control problems and is effectively a substitute for a power of attorney.
2. Avoiding Estate Litigation & Blended Family Planning: You may be entering a second marriage in which you want to provide for your second spouse during their lifetime, but leave the remainder of your assets to your children of the first marriage. Unlike a Will, which can be challenged by an unhappy spouse or child, through a trust you may divide your assets in any manner and the assets in your trust are not subjected to variation claims. The same protection is afforded in a situation where you want to treat children unequally; had you done so through your Will, your Will could be challenged by your unhappy child.
3. Probate planning / fee avoidance: By transferring assets into the trust, there is the potential to bypass the need to probate your Will/estate, and to reduce probate fees. A Will requires the executor to probate the Will, in order to administer your estate, which can be costly and time consuming. Unlike a Will, the trustee dealing with the trust does not need to obtain probate to administer the trust assets once you pass away. The Trust beneficiaries will receive their inheritance with fewer delays, and reduced legal costs. In BC, the probate fee is 1.4% of the gross estate. So if you transferred assets worth $1,000,000 to your trust, these assets would not flow through your estate on your death. The probate fee savings to your estate would be approximately $14,000.
4. Privacy: The trust provides a level of privacy and confidentiality that a Will does not. If your Will is probated through the BC Supreme Court, then it becomes a public document that can be obtained by anyone. A Will discloses your testamentary intention and the estate value, whereas your trust does not become a public document.
5. Foreign Assets: If you have assets in numerous jurisdictions, appointing one person as the trustee of your trust may avoid having to make multiple power of attorneys, one for each jurisdiction in which you hold assets.

Disadvantages to these forms of Trusts

1. These types of trusts are not suitable for nominal value estates.
2. Setting up the trust can be complex, and the professional fees (legal, tax and accounting) can be costly to establish or maintain the trust.
3. The trustee must commit time to managing the trust affairs, and have obligations imposed on them (e.g. filing the necessary tax returns). Finding someone to take on this burden can be difficult, and should you choose to act as your own trustee, you must be aware of your obligations.
4. In a Spousal Trust there is an added risk, because the spouses must both be entitled to receive all the income of the trust. Be cautious of with whom you enter into a Spousal Trust, as your situation may change later in life.
5. On the death of the settlor (the creator of the trust), or in the case of a Joint Spousal Trust, the death of the surviving spouse, all of the income and capital is taxed at the highest marginal rate. Compare this to a situation where you hold your assets outside of the trust; your estate would benefit from the graduated tax rates.

If you are considering setting up an Alter Ego or Spousal Trust, it is essential you get advice from tax and legal professionals to determine whether these types of trust are suitable for you. Contact one of our Wills and Estates lawyers for further information and guidance.

If you have questions, we’re here to help.

In a prior bulletin, we wrote about common errors and misconceptions that executors often encounter when administering estates. Here are some more common mistakes that executors make:

Not following the terms of the Will

Executors can be tempted to ‘re-write’ parts of the Will that they feel are unfair or impractical. For example, an executor might give personal belongings to a person not named in the Will, believing this is what the will-maker actually wanted. Other times, an executor might sell an asset and distribute cash to the beneficiary, despite that the Will directs that the actual article be given. The executor’s job is to distribute the estate according to the Will, not to re-write it.

Not properly valuing assets

If selling an estate asset, executors must ensure they obtain qualified appraisals and opinions as to value. This becomes especially important where estate assets are sold to a family member or other non-arm’s length purchasers.

Not knowing which expenses are estate expenses

Not all expenses related to the deceased’s death are proper expenses of the estate. Even where an executor makes an honest mistake, he or she may be personally responsible to reimburse the estate for costs that were improperly repaid to the executor, or to a beneficiary who incurred the expense. For example, it is usually not proper for the executor to reimburse beneficiaries for their cost of travelling to attend the funeral.

Failing to properly deal with estate debts and taxes

By law, debts of an estate, including tax liability, must be paid before beneficiaries receive their share of the estate. There is a specific order of priority set out by Canadian law that dictates in which border creditors should be paid. An executor who pays beneficiaries without taking all proper steps to clear debts and pay taxes may be personally responsible to the creditors for paying those debts.

Trying to do everything cheaply

An executor must be mindful of administration costs. However, he or she should also recognize where it is important to involve professionals, such as accountants, lawyers, appraisers, realtors and financial advisors. Failure to do this can result in mistakes, and end up costing the estate more money.

Wherever an executor makes a mistake involving estate assets, there is a risk of personal liability. When in doubt ask for professional help.

We are all aware that owning assets outside of Canada has its own set of challenges. Are you aware that it might affect your estate after you die, and that you might be well advised to have a foreign Will, as well? Do you know that the foreign law might, in fact, frustrate your estate plan?

Here’s how:

• Forced heirship regimes (i.e. a large portion of your estate must pass to your spouse and/or children and only a portion can be distributed per your own discretion);
• Different forms of co-ownership (e.g. in Quebec, the concept of joint tenancy does not exist. So when a co-owner of property dies, the deceased’s undivided interest in the property forms part of the deceased’s estate and does not pass to the surviving co-owner);
• Citizen restriction on land ownership (e.g. in China, individuals can own their house/apartment, but the government owns the fee simple land);
• Laws on illegitimacy (e.g. an illegitimate child in the Philippines is only entitled to half of that of a legitimate child);
• Obtaining multiple grants (your personal representative will likely have to obtain a grant of probate (or equivalent grant) in every jurisdiction in which you own real property. This process is time consuming and expensive).

The moral of the story is that multi-jurisdictional estate planning is difficult and using one advisor, and a single Will, to build your estate plan could be disastrous.

Consider two Wills, instead:

Ideally, if you own assets in multiple jurisdictions, you prepare a Will dealing exclusively with the distribution of property located in each jurisdiction. For those snowbirds, that means having a B.C. Will that distributes your B.C. estate, and a Will prepared in accordance with the laws of California for your house in Palm Springs.

At a minimum, if you insist on only having one Will, that Will should be reviewed/revised by an advisor in each jurisdiction to determine whether that one Will carries out your global estate plan.

The advantages include:

• Effectiveness– If each Will is prepared in accordance with the succession laws of the particular jurisdiction, it is more likely that the Will-maker’s overall estate planning objectives will be achieved.
• Confidentiality– Depending on the rules in a particular jurisdiction, all of the Will-maker’s assets that were disclosed in the course of the B.C. probate process may have to be disclosed again in another jurisdiction. Having multiple Wills, one for each jurisdiction, avoids excessive disclosure and preserves privacy.
• Speedier and More Straightforward Administration– the single Will may need to first be probated in Canada, and then “resealed” in the foreign jurisdiction. Having 2 Wills allows both processes to occur simultaneously.
• Tax and Fee Minimization– some jurisdictions levy an estate tax or fee on all property disposed of by a Will. For example, the probate fee in B.C. is approximately 1.4% of the fair market value of the Will-maker’s property as at the date of death. Use of a single Will could expose a Will-maker’s worldwide assets to those local levies. Using multiple Wills may reduce worldwide fee exposure, and the local levies would be assessed only on property located in the particular jurisdiction to which the Will applies[1].
• More Favourable Legal Regimes– For example, if a Will-maker owns land in Ontario that is registered under Ontario’s old land registry system, it can be transferred without probate. In such a situation, it may be advisable to execute a separate Will that only deals with that land.
• Different Executors– Multiple Wills permit different executors be chosen for different assets. If you have real estate in the U.S., it may be beneficial to choose your cousin, the real estate mogul from Florida to be the executor of your U.S. Will. This may be useful within the Canada as well. Consider a situation where a B.C. resident owned a significant stock portfolio that was managed in Alberta. The B.C. resident could execute a separate Will in Alberta, with a different executor from his/her B.C. Will.

Some disadvantages include:

• Cost– people are reluctant to hire one lawyer and one accountant, never mind lawyers in two or more different jurisdictions. The execution of multiple Wills involves a higher up-front cost (although this may be offset by savings on the administration of the estate).
• Review and Maintenance– We recommend that everyone review their estate plan every 5-7 years to ensure that it still effectively carries out their intentions. This becomes more cumbersome if you have multiple Wills.
• Limitation Period– In B.C., the children or spouse of a Will-maker can make a Wills variation claim against the Will-maker’s estate. Part 6 of the Wills Estate Succession Act sets a limitation period for Wills variation claims. However, the clock only starts running once a grant of probate has been issued. If the use of multiple Wills means that the B.C. Will does not require probate, then this limitation period may never expire and the estate may continue to be vulnerable to claims by a disinherited spouse or child.

We at Fulton have plenty of experience in assisting our clients with their multi-jurisdictional estates. If you have questions about a particular asset, or need assistance with a global estate plan, contact a member of our Wills & Estates Team.

[1] Note that B.C.’s probate fee legislation provides some relief in this respect. When calculating the value of a B.C. resident’s estate, the fee is only payable on real and tangible property located in B.C. It does not matter where intangible property is located, the value of such property would still be included in the calculation of the probate fee. This means that the value of any real estate owned by the deceased in another jurisdiction would not factor into the calculation of the probate fee in B.C., regardless of whether the Will-maker had 2 separate Wills.

The family cabin is a place to relax and get away from our busy and stressful lives. As the baby boomer generation ages, more and more parents are going to be looking for the most efficient way to pass the family cabin on to the next generation. Unfortunately, the transfer of a recreational property is never as simple as we would like. The purpose of this bulletin is to discuss some of the major issues we address when advising clients on the transfer of their recreational property to the next generation.

Income Taxes

Where a cabin is owned jointly between spouses (or owned by one spouse and gifted through the Will/estate to the surviving spouse), there are no tax implications when the first spouse passes away.

However, when the last/surviving spouse dies, there will be a deemed disposition of the cabin for fair market value. A capital gain will be triggered, and taxes will have to be paid on 50% of the capital gain.

Example: Jon and Sally purchased a cabin at the Shuswap in 1998 for $200,000. Jon passes away in 2016, making Sally the sole owner. Sally dies in 2019. At the time of Sally’s death, the cabin’s fair market value is $800,000. In this example, Sally’s estate would have to report a capital gain of $600,000 (proceeds of disposition ($800,000) less the cost of acquisition ($200,000)), and pay tax on 50% of that gain ($300,000).

Our clients often think they can avoid the deemed disposition described above by transferring the cabin into joint ownership with one or more of their adult children. This type of planning is problematic (CLICK HERE for more information on why) for a number of reasons, and ineffective for tax purposes because of subsection 69(1) of the Income Tax Act (Canada), which treats any transaction between related individuals (i.e. parents and children) as a disposition for fair market value. The parent has to report a disposition as though they have sold the property for its fair market value in their income tax return, and pay tax on 50% of the capital gain.

One strategy to reduce, or eliminate the tax on the deemed disposition triggered at death, or on a transfer to a related person, is to designate the cabin as your principal residence. A cabin can be designated as a principal residence (even if you do not use it as your primary residence) as long as it is “ordinarily inhabited”. Ordinarily inhabited includes living at the cabin for only a short period of time. If you own a home, and a cabin, there are a couple things to be aware of in order to ensure that you benefit as much as possible from this exemption:

• You and your spouse can designate only one of your residences as your principal residence for each year that you owned multiple residential properties. Deciding how to best utilize the principal residence exemption is complicated and often requires that you consider multiple factors, including predictions about whether the remaining residence will increase or decrease in value in the future. You should consult your accountant and possibly a realtor in making this determination;
• Reporting requirements for the principal residence exemption changed in 2016. Prior to 2016, you did not have to report the disposition of a principal residence when such property was fully exempt. Now you are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your tax return; and
• If your cabin property is large, you may not be able to claim the full principal residence exemption. Generally, the surrounding land in excess of half-hectare (1.24 acres) is deemed not to qualify as part of the principal residence unless the taxpayer can prove that such land is necessary to the continued use and enjoyment of the residence.

If you can adequately address the above, then claiming the principle residence exemption on the cottage is an effective way to transfer/gift the cottage to your children, tax free.

Another strategy to reduce tax payable is to sell the cabin to your child(ren) for fair market value, and structure the transaction so that your child(ren) pay(s) the purchase price over a maximum of five years. This can be done by having your children pay for the cabin with a promissory note that specifies that 20% of the purchase price is repayable each year. In this scenario, your child is required to come up with only 20% of the full amount of the purchase price upfront, and you may be able to use the capital gain reserve as a way of spreading the capital gain (and the associated tax) over a five-year period.

Property Transfer Tax

Aside from the income taxes payable on a transfer to your children, people often overlook the applicability of Property Transfer Tax (“PTT”). PTT is calculated based on the relevant property’s fair market value. If you and your spouse decide to transfer the cabin to one or more of your children, your children will be liable for PTT on the transfer, calculated on the fair market value as follows:

• 1% on the first $200,000 of value;
• 2% on $200,000 to $2,000,000; and
• 3% on > $2,000,000.

A transfer of a recreational residence to a related individual (e.g. child) may be exempt from PTT if it meets the following four criteria:

• Before the transfer, the person transferring the property usually resided on the property on a seasonal basis for recreational purposes;
• The property is classified as residential by BC Assessment, including the land and any improvements on the land;
• The land is 5 hectares or smaller; and
• The property has a fair market value of $275,000 or less.

All four of the above requirements must be satisfied, regardless of what interest you are acquiring in the property. For example, if you are acquiring an interest in your parent’s cabin and the cabin has a fair market value of $600,000, your 33% interest would be worth $200,000. In this case, you would not qualify for the exemption because the fair market value of the entire property exceeds $275,000.

Given these strict requirements, and the price of waterfront property in the Shuswap and other areas of the province, very few people will benefit from this exemption. That said, it can still be useful and is worth keeping top of mind when dealing with recreational properties.

Co-Ownership Agreement

Prior to transferring a recreational property to your children, you should consider having your children sign a Co-ownership Agreement. Alternatively, if you and your siblings inherit a shared interest in the family cabin, it may be in everyones’ best interest to sign one. A Co-ownership Agreement can, and should outline expectations for:

• Expenses- who pays for the utilities, cable, hydro etc.?
• Maintenance- who cuts the lawn and waters the garden?
• Renovations- who pays for the new roof, and what happens if one of the co-owners does not pay their fair share?
• Restrictions on sale- do all parties have to agree to sell, or can the majority force a sale? If the parent(s) continue to have an interest, do they have the final say?
• Right of first refusal- can a co-owner gift their interest in the property to their children, or should the other co-owners have the first right to purchase?
• Use schedule- who gets to use the cabin on long weekends?

A well-drafted Co-ownership Agreement should deal with all of the scenarios contemplated above and include default provisions if one or more of the co-owners is in breach of the agreement.

If you have question about the most practical estate solution for your recreational property, we can help.

ALERT – new development – as it turns out, a beneficiary designation is not a “sure thing” – even a beneficiary designation can be challenged.

We recently wrote about disputes that can arise over assets with designated beneficiaries, such as RRSPs, RRIFs and life insurance. Just after that bulletin, the Supreme Court of Canada released a new decision (Moore v Sweet 2018 SCC 52) that provides some clarity to the law on challenges to beneficiary designations – and is likely to lead to more of these disputes.

The type of dispute at stake in Moore might be called “the disappointed beneficiary” or “the unchanged beneficiary” disputes. They most often arise in the following circumstances:

1. Spouse A designates Spouse B as the beneficiary of an asset such as RRSP, TFSA or life insurance;
2. Spouse A and Spouse B later separate;
3. As part of their separation agreement, A and B agree to release or waive any claim to the assets of the other, including the right to share in the estate of the other;
4. Spouse A fails to change the beneficiary designation to remove B, and when A dies, B remains the designated beneficiary of the asset.[1]

What happens next is that Spouse A’s estate takes the position that Spouse B cannot claim the asset because of the separation agreement. Spouse B, unsurprisingly, takes the position that he/she should get the asset because Spouse A did not change the designated beneficiary.

Prior to the Moore decision, courts across Canada had applied different lenses to the analysis of these disputes, and in some cases reached divergent results. Ultimately, the courts could simply not agree on the effect of the beneficiary designation – did Spouse B get to keep the asset, regardless of the other circumstances (like the release/waiver in the separation agreement), simply because the beneficiary designation had remained in place?

(Moreover, even where courts did look beyond the designation and consider other circumstances, they were divided on which other circumstances were important and about how to interpret settlement agreements and asset legislation.)

The Moore v Sweet decision has resolved the biggest point of divergence in the case law by confirming that the beneficiary designation was not the end of the story, and courts are entitled to look at other circumstances to determine whether it would be unjust for Spouse B to keep the asset.

Essentially, the Court found that even where the legislation governing beneficiary designations says that Spouse B has the right to receive the asset, that doesn’t necessarily mean that Spouse B gets to keep it. If Spouse B would be unjustly enriched because, for instance, Spouse B had given up the right to that asset in a separation agreement, then Spouse B will have to turn the asset over to the estate or the person who ought to have received it.

This Supreme Court of Canada direction that beneficiary designations can be subject to challenge in this way will likely provoke a “run” on these sorts of disputes. Estates and others who wish to challenge the beneficiary designation will view the law as being more “on their side” after this new decision.

The take-away? More than ever, there is no guarantee that the designated beneficiary will get to keep the asset.

[1] That said, in some cases (including Sweet v Moore itself) the scenario is the opposite – the separation agreement provides that Spouse A must keep Spouse B as designated beneficiary, but then Spouse A changes the beneficiary without telling Spouse B. Spouse B then brings a challenge against the new beneficiary.

The Best Times to Update or Create a Will

Creating a Will is a vital responsibility for any adult and should be prioritized. A Will is a legal document that allows your property and assets to be distributed as you wish. Having an updated Will lessens the burden of administrative tasks on those involved and minimizes potential conflict for your family. It also provides needed clarity should you pass and prevents Canadian law from governing your assets.

Making a Will is not a one-time occurrence. You should have a Will that reflects your current situation and update it throughout your life as your circumstances change.
We encourage you to create or update your Will after major life events such as:

1.    Getting married

While your spouse would still likely inherit your assets even if you die without a Will, due to Canadian law, there are reasons why you need a Will:

• other people may also be entitled to a share (such as children);
• your spouse will face innumerable roadblocks in accessing your assets (and even information about your assets) if they are not named as an “executor” of your Will.  Without a Will there is no person with any authority to represent or handle your estate or your assets. To be in the best possible position, your spouse needs to have the authority of an executor.

2.    Having children

You likely have specific feelings about whether you want your children to inherit your assets immediately on your death or not. Your intentions will only be carried out if you have a Will. Further, when making a Will, you will select a guardian responsible for raising your children should you and the other parent (if any) pass. Naming a guardian is critical to how your children will be raised and how they inherit your assets.

3.    Purchasing a house, acquiring assets, or having a positive net worth

When you own high value assets it is important to have a Will to ensure those assets are distributed per your wishes.

4.    A change in close relationships

It is crucial to name an estate representative whom you trust to follow your wishes. If you created a Will previously and you no longer have a stable relationship with the named estate representative, it is important you update your Will.

If you have questions about creating or updating your Will, contact our Wills & Estate Team – we’re here to help.

Dealing with a parent’s dementia diagnosis can be overwhelming. However, confronting potential legal challenges head-on before the disease progresses can be one of the best ways to protect your parent’s lucid wishes.

There are two legal documents that should be created or reviewed immediately after diagnosis—a Will and a Power of Attorney (a “POA”). These documents are in addition to healthcare planning.

A diagnosis of dementia does not automatically preclude your parents from putting a Will or POA in place. Testamentary capacity (the mental capacity to understand and make a Will) is a legal construct, and is not determined by a medical diagnosis. In other words, neither advanced age nor the existence of a particular disease is itself evidence of a lack of capacity. If your parent has “good days” and “bad days” it may be possible to make a Will or a POA over a series of these “good days”.

Wills

Where the Will was made decades ago, it must be reviewed, as soon as possible after the dementia diagnosis, to determine whether anything has changed. Too often we hear from honest or well-intentioned children who have discovered that their parent’s Will does not reflect what the parent would want. Unfortunately, if these issues are discovered after the disease has advanced too far, the parent will not have the legal capacity to change the Will.

In addition to changes in circumstance, the Will should be reviewed by a lawyer who can identify changes in the law. The B.C. law surrounding Wills and Estates has seen significant development in the last 40 years, with the most recent overhaul taking place in 2014 with the introduction of the Wills, Estates and Succession Act.

POAs

One of the most commonly overlooked but valuable legal documents for families dealing with dementia is a POA. A POA provides the person named (the “attorney”) with the ability to manage an incapacitated individual’s (the “donor’s”) financial affairs. Most commonly, the child is appointed the attorney for their parent. This not only allows the child to access funds and pay for necessities for their parent, but turning control over to the children also provides protection from fraudsters who target our vulnerable seniors.

Don’t make the mistake of assuming that because your parents have a Will, they must also have a POA. POAs were not commonplace until about 20 years ago. If the Will was made prior to that, likely the POA was not put in place at that time. Also, it’s important to ensure the POA names an alternate attorney. If the POA was made a few decades ago, there was likely no consideration given to who should step in, if both parents becomes incapacitated, or one parent dies. The most useful POA appoints a primary (typically the spouse, while alive and capable) as well as an alternate (such as a child).

Particularly in situations involving loss of mental capacity, advance preparation can offer great comfort by creating certainty in uncertain times.

Life Insurance Trusts

During a previous bulletin, we discussed the downsides to naming a child (under age 19) as a direct beneficiary of a life insurance policy. Most significantly, the proceeds must be paid to the Public Guardian and Trustee’s office to hold, and then turned over to the child when he/she comes of age.

Option 1: Naming a Trustee to receive and hold proceeds

Many of our readers sent follow-up comments about the commonly utilized tool of directly naming a Trustee to hold the insurance proceeds on behalf of the child, which is done on the policy documents. Upon receiving the proceeds after the death of the insured, the named Trustee opens a trust account, and distributes cash to the guardian or pays expenses for the minor, all at the Trustee’s discretion. What remains of the funds is paid over to the child when he/she reaches age 19, with no strings attached.

We recommend that this approach be used, at a bare minimum, in all cases where beneficiaries of life insurance are minors.

If, however, clients want to postpone distribution until the child is much older than 19, this can only be achieved by using a Life Insurance Trust.

Option 2: Life Insurance Trusts

This “Cadillac” option looks like this: the client, during his/her lifetime, establishes and signs a formal Life Insurance Trust, which names a Trustee and sets out a schedule for distribution, which usually calls for the trust to end when the child is much older than 19. Due, perhaps in part, to a trend of children taking longer to become financially savvy, we find that when given the opportunity parents often elect to postpone the distribution date to age 25, or even 30, depending on the amount of money involved.

Furthermore, we are frequently drafting trusts that require the Trustee to pay lump sums to the child on certain birthdays (eg., 25% at age 25, another 25% at age 27, the balance at age 30). In this manner, parents are able to spread the amount out over a longer period, hopefully allowing their children to develop ideal money management habits over time, without turning over the whole amount at once.

Technicalities and Legalities: How Life Insurance Trusts Work

The Life Insurance Trust document is drafted by a lawyer, often at the same time as a Will, and is a stand-alone document which references the life insurance policy. The Trust document addresses issues such as successor Trustees, identifies beneficiaries, and describes the division among them, if more than one. It also includes recommended legal language to establish the relationship of the Trustee/settlor/beneficiaries, and the powers and authority of the Trustee.

Notification of the Life Insurance Trust should be given to the Life Insurance company, so that they don’t inadvertently pay out the funds to the minor or the Public Guardian and Trustee upon the death of the insured.

These Life Insurance Trusts must be established by clients during their lifetimes; they cannot be created posthumously, and without them the best that can occur is for the named Trustee to hold the funds until the beneficiary attains age 19, at which time the Trustee is then required to pay the remainder immediately to the child.

Life Insurance Trusts

During a previous bulletin, we discussed the downsides to naming a child (under age 19) as a direct beneficiary of a life insurance policy. Most significantly, the proceeds must be paid to the Public Guardian and Trustee’s office to hold, and then turned over to the child when he/she comes of age.

Option 1: Naming a Trustee to receive and hold proceeds

Many of our readers sent follow-up comments about the commonly utilized tool of directly naming a Trustee to hold the insurance proceeds on behalf of the child, which is done on the policy documents. Upon receiving the proceeds after the death of the insured, the named Trustee opens a trust account, and distributes cash to the guardian or pays expenses for the minor, all at the Trustee’s discretion. What remains of the funds is paid over to the child when he/she reaches age 19, with no strings attached.

We recommend that this approach be used, at a bare minimum, in all cases where beneficiaries of life insurance are minors.

If, however, clients want to postpone distribution until the child is much older than 19, this can only be achieved by using a Life Insurance Trust.

Option 2: Life Insurance Trusts

This “Cadillac” option looks like this: the client, during his/her lifetime, establishes and signs a formal Life Insurance Trust, which names a Trustee and sets out a schedule for distribution, which usually calls for the trust to end when the child is much older than 19. Due, perhaps in part, to a trend of children taking longer to become financially savvy, we find that when given the opportunity parents often elect to postpone the distribution date to age 25, or even 30, depending on the amount of money involved.

Furthermore, we are frequently drafting trusts that require the Trustee to pay lump sums to the child on certain birthdays (eg., 25% at age 25, another 25% at age 27, the balance at age 30). In this manner, parents are able to spread the amount out over a longer period, hopefully allowing their children to develop ideal money management habits over time, without turning over the whole amount at once.

Technicalities and Legalities: How Life Insurance Trusts Work

The Life Insurance Trust document is drafted by a lawyer, often at the same time as a Will, and is a stand-alone document which references the life insurance policy. The Trust document addresses issues such as successor Trustees, identifies beneficiaries, and describes the division among them, if more than one. It also includes recommended legal language to establish the relationship of the Trustee/settlor/beneficiaries, and the powers and authority of the Trustee.

Notification of the Life Insurance Trust should be given to the Life Insurance company, so that they don’t inadvertently pay out the funds to the minor or the Public Guardian and Trustee upon the death of the insured.

These Life Insurance Trusts must be established by clients during their lifetimes; they cannot be created posthumously, and without them the best that can occur is for the named Trustee to hold the funds until the beneficiary attains age 19, at which time the Trustee is then required to pay the remainder immediately to the child.

Tax Cautions for Assets Passing Outside of the Estate

As the saying goes, there are two certainties in life: death and taxes. When it comes to estate planning, the primary consideration for many clients is the preservation of as much of their wealth as possible. One important way to do this is through tax planning.

Trends in the cases that are hitting the courtrooms demonstrate a common misconception about RSPs and RIFs. These often stem from a desire to avoid probate fees, but can have unintended, often unfair, consequences.

MISCONCEPTION: Naming a beneficiary on an RSP or RIF avoids probate fees and therefore there will be more value in the residual estate to go to the beneficiaries of the Will.

Be careful here. While it’s true that probate fees are avoided, don’t forget about income taxes.

TRUTH: The estate may owe income tax on those plans (even with the designated beneficiary in place), and this REDUCES the residual estate of the deceased person.

It is true that structuring your assets so that as much as possible passes outside of your estate is beneficial, because it reduces the size of your estate on which probate fees are paid. But probate fees shouldn’t be the driver for all decisions. Sometimes, that cost savings is negated by the other problems that result.

We previously updated you on best practices to avoid disputes over RIFFs and RRSPs. Recall, tax liability for assets passing outside of the estate is joint and several between the beneficiary and the estate, but the CRA will generally assess the estate first.

As a result, you may avoid probate fees by designating a recipient but the asset will still trigger income tax for the deceased persons, payable by his/her estate. That tax has to be paid first, before any gifs in the Will can be fulfilled.

There are a few exceptions. For example, where the spouse is designated as successor annuitant of the RRSP or RRIF, the funds can be rolled into to the spouse’s registered account, and tax is deferred until the spouse withdraws the funds.

But, if the beneficiary is not a spouse, the tax is not deferred, and is immediately payable by the estate of the deceased.

Thus, if the deceased has named one individual as the beneficiary/successor annuitant of the RSP/RIF, that person receives the cash value, without paying the tax. The tax must be paid by the estate. If the beneficiaries of the estate are not the same as those receiving the RSP/RIF funds, then this creates a mis-match. Effectively, the Will beneficiaries will, by default, bear the burden of the tax on the RSP/RIF.

In extreme cases, the estate may be depleted by paying the tax and there may be no residual left for the beneficiaries of the Will.

Having assets pass outside of the estate can be an effective tax-planning tool but it is not a one-size fits all approach. The repercussion of “easy” ways to avoid probate tax can be the failure to plan effectively for the burden of income tax. Talking with a professional estate advisor who can help you see the big picture is the smartest way to preserve your wealth and legacy.