A Faulty Settlement and Some Buyer's Remorse

The recent decision of the Superior Court of Justice in the Murphy Estate considers what happens when parties to a proceeding settle a matter on the basis of faulty facts and one of the parties suffers from “buyer’s remorse”. 

Murphy Estate involved a dispute between the Deceased’s step-children and biological children after she died leaving in a will preferring her own children and leaving her step children with only nominal gifts.  Rather than litigating, the children and step-children reached an agreement that they would all split the estate equally and signed minutes of settlement to this effect.

When the settlement was reached, it was assumed the value of the estate was approximately $270,000 (and included a RRIF of $150,000).  This was based on a schedule prepared by the estate solicitor which listed the RRIF as an estate asset. However, the minutes of settlement themselves did not include any reference to the assets of the estate but instead simply contemplated the division of the residue.  

After the minutes of settlement had been signed, it was discovered that the beneficiary on the RRIF was not the Deceased’s estate, but was the Deceased’s two children.  The bank holding the RRIF then paid the proceeds to the children on the basis of the beneficiary designation. 

One of the step-children brought a court application seeking the repayment of the RRIF to the estate and arguing that, notwithstanding the fact that the biological children were the designated beneficiaries, the proceeds of the RRIF were to be distributed as per the terms of the settlement.  She argued that because the RRIF had been included on the statement of assets she had relied upon in reaching the settlement, a mistake had occurred and the RRIF should be included in the estate. 

The court found that in order to rely on the doctrine of mistake to set aside the agreement, the applicant would have to establish that the deceased’s children (who were the beneficiaries of the RRIF) had also been aware of the mistake when the settlement was reached.  Here, the court held that this wasn’t the case – all parties had believed that the estate was the beneficiary of the RRIF and it was only after the minutes of settlement had been signed did they learn the truth. 

Ultimately, the court decided that while step-daughter may have made a “bad bargain” by signing the minutes of settlement she was bound by them and the RRIF did not need to be repaid to the estate.    

Does Divorce Revoke Your Will?

On Monday, I blogged about the law in Ontario that provides that marriage will revoke your will.  But what happens when you divorce?   

There is a common misconception that divorce will revoke a will.  However, this isn’t actually the case.  Pursuant to s. 17(2) of the Succession Law Reform Act [“SLRA”] getting divorced will revoke any gift in the will left to the spouse and any appointment of the spouse as executor (meaning that other beneficiaries named in the will won’t lose out) and the will is to be construed as though the ex-spouse pre-deceased the testator. 

Where the ex-spouse is named as executor and there is an alternate named in the will then that individual will become the estate trustee.  If not, the appointment of estate trustee will be governed by s. 29 of the Estates Act (I discussed this provision in a previous blog). 

The fate of any gift left to the ex-spouse will depend on whether an alternate beneficiary has been named in the will.  If not, the next consideration will be what type of gift it was.  If it was a specific gift then it will fall into the residue of the estate (and be distributed in accordance with the residue clause of the will).  If it was a gift of residue, it will be distributed pursuant to the rules of intestacy as they apply to the testator. 

A divorce is a good time to review a will and consider what implications the divorce will have.  It is also a good time to consider whether there are any assets that carry with them beneficiary designations (such an RRSP, TFSA, or insurance policy) in favour of the former spouse that need to be changed. 

Finally, as I have previously discussed, bear in mind that being separated (and not legally divorced) generally has no impact on an estranged spouse’s entitlement to your estate – so a separation is also a good time to turn your mind to estate planning and whether a will, powers of attorney, and beneficiary designations should be changed (or put in place).

Beware Ill-Advised Beneficiary Designations

It constantly amazes me that people will go to the trouble of making a will and then manage to defeat their estate planning by doing beneficiary designations that have unintended consequences.  A recent article in the Wall Street Journal discusses this problem

Beneficiary designations are generally seen on financial products (such as RRSPs or TFSAs) or insurance policies.  A beneficiary designation can be made in a will (or in a separate document generally prepared by a lawyer).  However, banks or insurance companies will generally have a form that can be completed. 

There are a number of benefits to designating beneficiaries on an account or policy where possible.  Having a beneficiary designation means that the asset will be distributed outside the individual’s estate directly to the named beneficiary and won’t be included in the value submitted on a probate application (and attract probate fees).  Additionally, generally speaking assets that are distributed outside the estate will not be subject to the claims of creditors. 

However, a problem is that people often don’t recall who (if anyone) they have designated as a beneficiary on their applicable accounts.  This can cause problems if they assume the asset will come into the estate and be distributed according to the residue clause in the will when the beneficiary designation actually provides otherwise.

Another issue arises when beneficiary designations are made in a will (or an individual plans her estate envisioning that the proceeds of, say, an RRSP are going to come into the estate on death) – and the individual later designates a beneficiary not considering the consequences on the distribution of an estate.

Where a beneficiary designation is drawn up by a lawyer (either as part of a will or separately) it is a good idea to provide a copy to the bank or insurance company so they can keep it on file – this can help avoid a problem after death where a dispute erupts over who the actual beneficiary is supposed to be. 

Finally, it is also a good idea to keep a detailed list of accounts or policies where a beneficiary designation has been made and review it every couple of years to ensure it is still current.  There will be times where a beneficiary designation made years earlier no longer makes sense and it’s desirable to catch that sort of problem early.   

Don't Delay When Claiming for Life Insurance Benefits

The recent decision in Dicaro Estate v. Manufactures Life Insurance Company considered an estate trustee's ability bring a claim for insurance proceeds more than ten years after the deceased's death.  

The deceased died in 1999 due to complications relating to liver disease and after undergoing a biopsy.  He had worked for Molson Breweries for almost 25 years and had various insurance policies issued by Manulife, the defendant in the proceeding. 

After the deceased’s death, his widow (who was the plaintiff in the action) applied for and received the basic benefit claim of $45,000.  On the proof of claim form filed, the plaintiff specified that the death was NOT accidental (and, accordingly, no accident/dismemberment benefits were paid). 

In 2000, the plaintiff commenced a medical malpractice claim against the hospital and medical practitioners involved in the deceased’s care at the time of his death.  The decision was released in 2003.  It was during that proceeding that the plaintiff later claimed she first learned that the deceased’s death was caused by an ‘accidental poke’ during the biopsy.  As a result, in 2007, the plaintiff filed a claim with the defendant for accident benefits.  In 2008, Manulife denied the claim due to lateness as well as non-compliance with the proof of claim provisions in the insurance contract. 

The plaintiff commenced an action against the defendant in 2010 seeking the accidental death benefits under the deceased’s various insurance policies.  The defendant then moved for summary judgment seeking to have the plaintiff’s claim dismissed arguing that there was no genuine issue for trial. 

Justice Chapnik considered the various limitation periods that could possibly apply – under the policy itself as well as (the now revoked) s. 206(1) of the Insurance Act and s. 34(5) of the Limitations Act.  She found that no matter what permutation of the limitation periods was applied, the plaintiff was clearly out of time for bringing the claim. 

The plaintiff also relied on s. 96(1) of the Courts of Justice Act, arguing that principles of fairness and equity should be applied in the circumstances.  However, Chapnik J. found that this would not be appropriate in the given case given the plaintiff’s non-compliance with limitations imposed by statute. 

Accordingly, she granted the defendant’s motion for summary judgment and dismissed the plaintiff’s claim.    

Man Who Killed Wife Is Denied Her Life Insurance

There’s a common law rule that if you wrongfully kill someone and you’re the beneficiary of their life insurance policy, you don’t get the proceeds.  The recent decision in Dhingra v. Dhingra considers whether this principle applies if the prospective beneficiary is found not criminally responsible because of a mental disorder. 

The applicant commenced an application seeking insurance proceeds of $50,000 from the policy of his deceased ex-wife.   The applicant had been charged with second-degree murder after bludgeoning and stabbing his ex-wife (who was the insured life on the policy) to death – but was found not criminally responsible by reason of mental disorder.  The deceased’s executor (who was her son with the applicant) opposed the payment of the proceeds to the applicant, arguing that they should be paid to the estate.

The executor argued that the applicant was disentitled to the insurance proceeds by virtue of the “public policy rule,” which provides that an individual who wrongfully kills another may not profit from the act of killing (a very helpful discussion of the pubic policy rule can be found in the Ontario Court of Appeal’s decision in Oldfield vs. Transamerica Life Insurance Company of Canada). 

The executor’s position was that, in this case, it was clear that the applicant had committed murder and, on the basis of the public policy rule, it was clear that the applicant ought to be barred from receiving property he otherwise would have acquired as a result of the death. 

The applicant argued that he was the only one named as a beneficiary on the policy and, as such, he was the only one entitled to make a claim to the proceeds.  He also pointed to the fact that the insurance company did not oppose payment to him.  Additionally, the applicant argued that given the finding of no criminal responsibility in regard to the death of his ex-wife, the public policy rule did not apply to this case.

Justice Pollak disagreed with the applicant.  She found that notwithstanding that the applicant had been found not criminally responsible for killing his ex-wife, it was obvious he had physically committed the crime. She further noted that there was no judicial support for the contention that for the public policy rule to apply the court was required to find an intent to commit a crime.  Accordingly, she found that the public policy rule applied so as to disentitle the applicant to the insurance proceeds.  According to this article from the Toronto Star, the applicant intends to appeal the ruling.   

How is an RRSP Taxed on an Annuitant's Death?

An advantage to contributing to RRSPs is the associated tax benefits.  However, the tax deferral doesn’t last forever – eventually the Canada Revenue Agency will come knocking.  While tax liability arises when funds are withdrawn from an RRSP, it will also arise when an RRSP annuitant dies. 

The tax treatment of an RRSP on an annuitant’s death will depend on who the beneficiary is.  Generally, the CRA will consider an annuitant to have received the proceeds of an RRSP at the time of death and the annuitant’s executors will need to report the amount, as well as any other amounts the annuitant withdrew during the year, in the annuitant’s tax return for his or her year of death (referred to as the “terminal return”).  As you can imagine, the taxes can be very high!  

However, there are some situations where a tax-deferred rollover will be available.  The first is where the beneficiary of the RRSP is the annuitant’s spouse.  The other is where the beneficiary is the annuitant’s child or grandchild (providing the child or grandchild is (1) a minor; or (2) mentally or physically infirm).

In situations where the beneficiary is a spouse or a physically or mentally infirm child or grandchild (who was also financially dependant on the annuitant) the RRSP can be rolled over (into an RRSP, RRIF, or annuity).  Where the beneficiary is a minor child or grandchild (who isn’t infirm), the proceeds can be rolled over into an annuity which can make payments until the child/grandchild turns eighteen – after this taxes will become payable. 

When an estate plan includes RRSPs careful consideration to the taxes is important. For more information, the CRA’s memorandum, “Death of an RRSP Annuitant” is a good one!

Estate Planning Considerations for Separated Spouses

When spouses separate, they usually pay a lot of attention to how their assets are being divided up – however, something that’s often forgotten is what estate planning steps should be taken.  I am sometimes asked by clients what effect their separation will have on their will or the distribution of their estate and my answer is usually “none.” 

In Ontario, when spouses are legally divorced, s. 17(2) of the Succession Law Reform Act (“SLRA”) provides that any appointment of the spouse as executor and any provision leaving a share of the estate to the spouse are revoked.  However, there is no similar provision dealing with situations where spouses are merely separated – meaning, the surviving spouse will maintain his or her entitlement under the will unless the will has been changed. 

In situations where there is no will (an “intestacy”) the separated spouse will come under the definition of “spouse” in s. 1(1) of the SLRA.  Accordingly, he or she will be entitled to inherit pursuant to the intestacy rules found in Part II of the SLRA – depending on the value of the estate and whether or not the deceased had children, the separated spouse may be entitled to everything!

For the reasons above, wills should generally be revised (or made) when spouses separate.  Beneficiary designations (such as on RRSPs, TFSAs, and insurance policies) should also be reviewed and changed where desirable. It is also advisable to have a separation agreement in place which specifically addresses what, if any, rights each spouse is to have on the death of the other. 

An additional concern relates to powers of attorney for property and for personal care.  If a spouse has appointed a (now estranged) spouse as attorney for property or for personal care, terminating the powers of attorney is certainly something to consider. 

It’s important to understand a person can’t just be “fired” as an attorney.  Rather, if the spouse wishes to terminate the powers of attorney, he or she should either execute new ones or revoke the existing ones (and keep in mind that s. 12(2) of the Substitute Decisions Act, 1992 requires the revocation to be in writing and witnessed by two people).

An RESP on a Subscriber's Death: Should it Stay or Should it Go?

A Registered Education Savings Plan (“RESP”) is a great way for an individual (the “subscriber”) to put away money for the post-secondary education of a loved one.  There are also benefits that come from tax deferral and permissible income splitting at the time of withdrawal.  However, something that is often not considered is what will happen to the RESP on the subscriber’s death.     

The administration of an RESP on a subscriber’s death will depend on the terms of the contractual agreement and the terms of the subscriber’s will.  Unlike an RRSP or a TFSA, the proceeds of an RESP cannot flow outside the subscriber’s estate into the hands of a designated beneficiary.    

An RESP is an asset of the subscriber.  As such, on the subscriber’s death, unless he or she has set out instructions to the contrary, the right to the contributions to the RESP arguably belongs to the subscriber’s personal representatives and should be returned to the subscriber’s estate.  In some situations, this is not what the subscriber would have intended.

If the subscriber wants the RESP to be continued, then a successor subscriber should be named.  The contractual terms of the RESP should be examined to determine if they permit any person (including the subscriber’s personal representatives) to acquire the subscriber’s rights under the RESP and thus become succeeding subscribers. 

It is possible to continue an RESP by naming successor subscribers in a will; however, again, it’s essential to examine the terms of the contract before doing so.  If the RESP is to be continued, important considerations include how it will be funded; who the intended beneficiaries are; and how the funds should be invested.

If the subscriber doesn’t want the RESP continued after his or her death, there are a number of options, including: the contributions can simply be returned to the estate and fall into the residue; they can be withdrawn and distributed to beneficiaries named in the subscriber’s will (or the right to withdraw can be transferred to named beneficiaries); or they can be withdrawn and used to fund an education trust created for named beneficiaries. 

As a final note, it’s important to remember that RESPs are a creature of s. 146.1 of the Income Tax Act.  Accordingly, the relevant provisions should be reviewed before any estate planning occurs.

TFSAs - A Missed Opportunity for Most Canadians?

I was recently reading the Wealthy Boomer, Jon Chevreau’s blog in the Financial Post, and was surprised to learn that most Canadians still do not have a tax-free savings account (“TFSA”). 

A TFSA is a flexible savings vehicle which allows Canadians to earn investment income tax free.  Account holders can contribute up to $5000 per year to their TFSAs.  The interest earned is tax-free and there are no tax consequences to withdrawing funds.  However, contributions to the accounts are not tax deductible.  This is in contrast to RRSPs, where withdrawals are taxed but contributions are deductible.

Unused contribution room can be carried forward and the full amount of withdrawals can be repaid in future years. Re-contributing in the year of withdrawal is ill advised because the account holder runs the risk of over contributing, which can result in penalty tax. 

Funds can be transferred to a spouse or common law partner for the purpose of contributing to a TFSA and the assets of the account can be transferred to a spouse or common law partner on death.  For more information on designating beneficiaries on TFSAs read my blog on the topic here

Despite the many benefits of having a TFSA, not everyone seems convinced.  Chevreau cites a report by Angus Reid, commissioned by ING Direct, which found that 53% of Canadians don’t have an account. While a 1/3 of us have contributed, more than half of those who have not don’t intend to open an account in 2010 or 2011 – and 13% of us aren’t even aware that TFSAs exist.  All of which is unfortunate because the accounts are an excellent way of saving for retirement (or anything else for that matter) and carry with them distinct estate planning benefits. 

Death of a TFSA Holder - How to Avoid the Taxes

The Globe and Mail has posted a great video about how to pass on your Tax Free Savings Account [“TFSA”] on death without triggering taxes. 

Depending on the intended beneficiary, there are two main ways to pass on your TFSA.  The first is by naming a successor account holder.  A successor account holder can be either your spouse or your common law partner.  Where a successor has been named, the effect is that when you die, he or she will be able to simply “take over” your TFSA – meaning the successor will be able to contribute to, administer, and withdraw from the account.  The transfer should be seamless and no taxes will be payable. 

The other option is to name a beneficiary on the account.  Possible designated beneficiaries include a spouse, former spouse, common law partner, child, or a “qualified donee” (such as a registered charity).  In this case, while a tax free transfer will still be available, there will be time limitations dictating by when the transfer must have been made.  Additionally, if the TFSA earns income subsequent to the account holder’s death (and prior to the account being transferred to the beneficiary), then that income will be taxed in the hands of the beneficiary.

An important distinction between naming a successor account holder and a designated beneficiary relates to what can be done with the proceeds of the account once they’ve been received.  When a successor holder is named, the TFSA will continue to exist, with the income earned sheltered from tax.  The successor’s contribution room for his or her own TFSA will remain unaffected.  When a designated beneficiary is named, that beneficiary will be able to withdraw any amounts up to the fair market value of the TFSA at the original account holder’s death on a tax-free basis.  However, the beneficiary will only be able to protect future growth in the TFSA from tax by contributing it to his or her own TFSA (and this will be subject to available room). 

If you are interested in learning more about the implications of the death of a TFSA holder, the website for the Canada Revenue Agency has useful information.