Some Tips on Paying Estate Debts

One of an estate trustee’s duties is to pay the debts that a deceased individual owed when he or she died.  As I have previously discussed, the estate trustee is generally not personally liable for the deceased’s debts – they are paid from the assets of the estate.  However if an estate trustee distributes the estate assets to the beneficiaries before debts have been satisfied, the estate trustee might be personally liable for any amounts owing. 

One way for an estate trustee to avoid being on the hook for debts after the distribution of th estate is to advertise for creditors.  Section 53 of the Trustee Act provides that an estate trustee will not be personally liable for claims by creditors within the amount of time specified in a notice published.  In other words, if the estate trustee puts an advertisement in a newspaper asking creditors to contact her within a specific time, the estate trustee will not be personally liable for claims that are not made by the specified date if she then distributes the estate. 

Unfortunately, s. 53 is not specific about the form, content, or timing the notice should take.  However, certain rules of convention have emerged.  Generally, an estate trustee should advertise at least three times in a local paper (where the deceased lived) and allow no less than thirty days between the date the advertisement was first published and the stated date on which the estate will be distributed. 

As a final note, it is important to be aware that s. 53(2) of the Trustee Act provides that the effect of advertising for creditors is not to actually extinguish any claims the creditors might have – it is simply to protect the estate trustee.  The creditors will still have the ability to trace the distributed assets of the estate to the hands of the beneficiaries.             

Help! I Need To Get Probate, But Can't Pay the Fee

In Ontario, when an executor applies for a certificate of appointment of estate trustee (“probate”), the Estate Administration Tax Act requires her to pay the estate administration tax (a “probate fee”).  The amount of the probate fee payable will depend on the value of the assets listed on the probate application and is $5 per $1,000 up to $50,000 and $15 per $1,000 by which the value of the estate exceeds $50,000. 

In some situations, the estate will lack the liquidity to pay the probate fee.  This typically occurs when there is no cash in the estate (such as when the deceased’s bank accounts were held jointly with a right of survivorship) and there is an asset, such as a house, which the estate trustee requires probate to deal with.

In circumstances such as this, s. 4 of the Estate Administration Tax Act allows the estate trustee to apply to the court for a grant of probate prior to the probate fee being paid.  In order to obtain probate in advance of the fee being paid, s. 4(2) provides that the estate trustee must file an affidavit (and such other material as the court requires) that satisfies the court of the following:

  • Probate is urgently required;
  • Financial hardship would result if probate is not granted before the probate fee is paid; and
  • Sufficient security has been furnished for the payment of the probate fee.    

In situations where there is cash in the estate, financial institutions typically won’t release it to an estate trustee prior to probate being granted.  However, this doesn’t mean the estate trustee must try to have payment of the probate fee deferred. 

In these circumstances, a bank holding enough of the deceased’s cash to satisfy the probate fee will typically release the funds necessary to pay the probate fee (by way of a bank draft made payable to the Minister of Finance ) upon receiving proof of the amount owing. 

I'm the Estate Trustee...How Do I Obtain Probate?

I’ve previously blogged about how a prospective estate trustee obtains probate when there’s no will, so today I thought I’d review how an estate trustee appointed under a will goes about obtaining probate (technically referred to as a “certificate of appointment of estate trustee with a will”). 

An estate trustee should first determine whether probate is actually necessary.  There is no law that requires an estate trustee to obtain probate – the estate trustee’s authority derives from the will itself, not a certificate of appointment.  However, frequently an estate trustee cannot take many administrative steps (such as calling in the proceeds of a bank account or transferring title to real estate) without having obtained probate. 

The material that the estate trustee must file with the court is set out in rule 74.04 of the Rules of Civil Procedure.  The necessary materials include the completed application, original will, an affidavit of execution establishing that the will was duly executed (and if one cannot be obtained, evidence that the will was duly executed), the certificate of appointment of estate trustee with a will, and an affidavit verifying that a notice of application has been served on those entitled to share in distribution of the estate. 

If there are unborn or unascertained beneficiaries of the estate or if a beneficiary is a minor, then The Children’s Lawyer and the minor’s parents must be served with the notice of application.  If a beneficiary is incapable then The Public Guardian and Trustee must be served.  An estate trustee applying for probate is justified in hiring a lawyer to prepare and file the application (and paying for the services out of the estate).  However, for the do-it-yourselfers, pre-formatted and fillable forms are available on the government website

The estate trustee is also required to pay the necessary probate fee (referred to as the “estate administration tax”) when the application is made.  The amount owing is based on the value of the estate.  The estate trustee does not have to pay the amount personally.  Generally speaking, banks will release a bank draft from the deceased’s account payable to the minister of finance for the amount due. 

What's a 'Probate Fee' and How Much Is It?

In Ontario, where a prospective estate trustee applies for a certificate of appointment (colloquially referred to as “probate”), pursuant to s. 2(1) of the Estate Administration Tax Act she is required to pay the estate administration tax (often called the “probate fee”) – the exception being when the value of the estate does not exceed $1,000 - in which case no tax is payable.  The fee is made payable to the Minister of Finance (of the provincial government).     

The amount payable is based on the value of the estate – it is $5 for each $1,000 of the first $50,000 of the estate and $15 for each $1,000 for the amount over and above $50,000.  Our good friends at the Toronto-based accountancy firm Yale & Partners LLP have been kind enough to put together a probate fee calculator which makes estimating the amount owing all the easier!

Before figuring out how much tax is owing, it’s important to understand what assets are included in calculating the value of the estate for probate purposes.  An application for a certificate of appointment (such as the one used when the deceased dies with a will) includes a section where the value of certain assets is to be included (and the total value of these assets forms the basis for calculating the tax owing). 

Specifically, the assets to be included are the deceased’s real estate in Ontario (net of encumbrances) and the deceased’s personal property (and this includes cash, investments, and personal effects).  Note that with the exception of encumbrances on real estate (for example, a mortgage), a deceased’s debts cannot be offset against the assets listed on the probate application – this means that the probate fee is based on the gross value of the estate, not the net value. 

There is some property that is not included in the value on the probate application – and this includes real property outside of Ontario and assets that flow outside the estate (such as joint assets, and insurance policies/RRSPs/RRIFs with a designated beneficiary).

There are various estate planning steps that can be employed to reduce the probate fee – however, there are often risks that come in doing so.  It’s a good idea to make sure you understand the risks before taking any such steps.

How Do You Obtain Probate When There's No Will?

I’ve previously blogged about who’s entitled to be the estate trustee when there’s no will; however finding the appropriate candidate isn’t all that’s involved – the prospective estate trustee must be actually appointed by the court to obtain the necessary authority to administer the estate. 

This is not simply a procedural issue – where someone dies with a will naming an executor, that executor’s authority derives from the will itself (although most frequently, in order to gain control of estate assets, the named executor will require the court to grant a certificate of appointment).  However, where there’s no will, no one has the authority to administer the estate until probate has been granted by the court. 

The appointment necessary when an individual dies without a will is referred to as a “certificate of appointment of estate trustee without a will” and the procedure involved falls under rule 74.05 of the Rules of Civil Procedure.  

To begin with, the prospective estate trustee is required to file an application for a certificate of appointment.  In doing so, she is required to put on notice (by way of the required notice of application) the beneficiaries of the estate (if a beneficiary is a minor, The Children’s Lawyer must be put on notice; if a beneficiary is mentally incapable, The Public Guardian & Trustee must be put on notice). 

Additionally, the prospective estate trustee must file with the court a renunciation of anyone who is otherwise entitled to be appointed as estate trustee and who is not otherwise applying (s. 29 of the Estates Act specifies who that would be).  Consents by the beneficiaries who, together, have a majority interest in the estate are also required.

Finally, it should be noted that s. 35 of the Estates Act requires the prospective estate trustee to post a bond – unless he or she is the spouse of the deceased and the value of the estate does not exceed the preferential share prescribed by s. 45(6) of the Succession Law Reform Act (currently $200,000).   

How is an Estate Distributed When There Is No Will?

Any estates lawyer will tell you that it’s important to have a will.  However, according to Leave A Legacy, 30% of you won’t get the message and will die without one (referred to as an “intestacy”).  When you die with no will, the law, in effect, makes one for you and the distribution of your estate will be governed by Part II of the Succession Law Reform Act [“SLRA”].

Where the deceased is survived by a spouse but no “issue” (i.e. lineal descendants) or where the deceased dies leaving an estate valued at $200,000 or less then the spouse alone is entitled to the estate.

Where the deceased has a spouse and children, the spouse is entitled to the first $200,000 (referred to as the “preferential share”) and the distribution of anything above that amount depends on the number of surviving children.  If there is one child, then the spouse receives half of the balance over and above the preferential share.  If there is more than one child the spouse will receive one-third of the balance over and above the preferential share.  The remainder of the balance remaining will be divided amongst the surviving children (with certain rules applying if a child has predeceased but has left issue of her own).

In situations where there is no spouse, children, or other lineal descendants, then the deceased’s estate will be divided equally amongst his parents living at his death.  If neither parent is living then the estate will go to the deceased’s siblings (and if a sibling has passed away with issue, then that sibling’s share will go to his or her issue).

If there is no spouse, issue, parents, or siblings alive, then the estate will go to the deceased’s nieces and nephews then living – and if they aren’t alive either then it will to the deceased’s next of kin.

What happens when there are no next of kin?  The government ends up the winner and pursuant to the Escheats Act the estate devolves to the Crown.

When Can a Trustee Be Excused for Causing a Loss?

On Wednesday I blogged about the decision of the Ontario Superior Court of Justice in the McDougall Estate.  The case involved a handwritten will and codicil made by the deceased that was difficult to decipher.  A dispute arose between the estate trustee and the residual beneficiary about whether the will authorized the estate trustee to make a charitable gift.   Ultimately, van Rensburg J. found that although the deceased had intended that a charitable gift be made, the gift failed because the deceased had failed to specify the amount. 

Given that the estate trustee had already made the $10,000 donation, an issue arose as to what recourse the residual beneficiary of the estate had.  The beneficiary argued that as the donation had been improper, the estate trustee ought to be required to repay it (as well as the travel expenses incurred delivering the funds to the charity).  The estate trustee took the position that notwithstanding that she had made the donation in error, she had acted reasonably and in good faith and ought not to be held personally liable. 

Section 35 of the Trustee Act provides the court with the authority to relieve a trustee from liability for an improper act if it is satisfied that the trustee acted reasonably and honestly.  Additionally, the common law also allows the court to excuse a trustee from liability for an innocent mistake made in good faith. 

Here, van Rensburg J. found that notwithstanding the court determined that the gift to charity was not valid, the estate trustee’s interpretation of the will had not been unreasonable.  Additionally, she pointed to the fact that although the estate trustee had erred, she had derived no personal benefit from the error.  Ultimately, van Rensburg J. found that the circumstances were such that the trustee ought to be excused from liability and not required to repay the estate for the donated funds.

Yet Another Reason to Leave the Will Drafting to a Lawyer

There are innumerable problems that can arise when people try to do their own wills.  The recent decision in the McDougall Estate discusses the difficulties that arose in trying to decipher an individual’s largely illegible will. 

The deceased left a will and a codicil that were both in his own handwriting.  The parties were all in agreement that, when taken together, the documents constituted a valid holograph will and codicil.  Unfortunately, there were large parts of both documents that were illegible – and insofar as the court was able to decipher the language of the documents, it was still difficult to make out exactly how the deceased was trying to distribute his estate. 

The parties agreed that the effect of the will was to leave the bulk of the deceased’s estate to his sister.  However, there was a dispute over whether the will authorized the estate trustee to make a donation to charity.

Although the wording of the will was ambiguous, the parties agreed that, read without the codicil, the will authorized the charitable donation only if the residual beneficiary died before the testator or renounced her share of the estate.  The parties disagreed as to the effect of the codicil.

The estate trustee argued that the codicil permitted her to make a bequest to charity prior to transferring the balance of the estate to the residual beneficiary.  The beneficiary argued that the relevant words of the codicil were illegible and should be given no meaning.  Moreover, she argued that the language of the codicil, as it could be deciphered, was not particular as to the dollar amount of any charitable donation and, accordingly, should fail.

Justice van Rensburg found that when reading the will and codicil together it appeared that the deceased intended that a bequest to charity be paid prior to the residue being distributed to the beneficiary.  However, van Rensburg J. went on to find that the fact the amount of the bequest was not specified was fatal and on this basis the gift failed.  Accordingly, she found the estate trustee had wrongfully made the payment to the charity.

Tune in on Friday to find out what the consequences to the estate trustee were.  

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).

Did You Know Marriage Will Revoke Your Will?

Something that many people do not realize is that, in Ontario, getting married will revoke your will.  This rule is found in section 15(a) of the Succession Law Reform Act (“SLRA”).  Section 16 provides a few exceptions to the rule, such as when the will specifies that it is being made in contemplation of marriage or the spouse elects in writing to take under the will and files the election with the estate registrar within a year of the testator’s death. 

Assuming the will is revoked by marriage, the effect is that, on the testator’s death, her assets will be distributed pursuant to the rules of intestacy found in part II of the SLRA.  If the testator has no children, then the surviving spouse will be entitled to the entire estate. 

If the testator has children, then the spouse will receive the first $200,000 of the estate and the division of the balance will depend on how many children there are (if there’s one child, the spouse and child will split the balance equally; if there are two or more children, the spouse will receive 1/3 of the balance and the children will split the remaining 2/3). 

The rule that marriage will revoke a will can have unintended consequences.  This recent article from the National Post tells the story of a man who committed suicide two weeks after marrying a woman he’d met fourteen months earlier.  Two years prior he’d made a will leaving everything to his only daughter; however, that will was revoked by the marriage, meaning the intestacy rules kicked in. 

His estate was relatively small so his new wife received the lion’s share of the estate.  His sister has since started a blog, Mo’s Muse, about inheritance laws in Canada – and has called for the law that marriage revokes a will to be repealed in Ontario as it recently has been in British Columbia and Alberta.   

'I've Gotta Claim' 'You Gotta Claim' 'Legals Ate the Estate'

Estates lawyers frequently tell their clients that they should be careful with their claims, lest there’s no money left.  The recent decision of Kazarian v. Fraser considers the situation of where all the money is eaten up.

The deceased died without a will.  He was survived by his common law spouse and his two daughters.  Pursuant to the rules of intestacy, Part II of the Succession Law Reform Act [“SLRA”] provides that his two daughters were entitled to share equally in the estate.  His common law spouse brought a claim for dependant support pursuant to Part V of the SLRA

Following the Deceased’s death, there was litigation involving his estate (including allegations that the Deceased hid assets outside Canada to defeat claims of his former wife).  As part of the administration of the estate, the estate trustee was required to hunt down assets as well as defend various claims brought against the estate.

By the time the court adjudicated the common law spouse’s dependant support claim, the estate was insolvent – in large part because the legal fees incurred (both in regard to the litigation and administration expenses) exceeded the value of the assets. 

An issue arose as to whether the legal fees and administration costs incurred took priority over the dependant support claim of the common law spouse.  The estate trustee argued that she administered the estate she was left with – and had to hunt down assets, defend claims, and retain counsel to do so.  As such, the attendant costs were justifiably the expense of the estate.

The common law spouse argued that the legal costs were not appropriately administration expenses of the estate and, in the event they were, they ranked in priority after her claim for dependant’s relief. 

Justice Crane agreed with the estate trustee.  At first instance, he found that legitimate estate expenses took precedence over a dependant support claim.  In addition, he found that insofar as the estate trustee had to track down foreign assets, this was the estate’s expense.  Moreover, the claims against the Deceased were rightfully defended by the estate trustee and the legal expense was that of the estate.  

In any event, this has ended up as the proverbial “Bleak House” scenario.  The common law spouse with the dependant support claim lost in court – and as for the two daughters who were the intestate heirs? It appears estate expenses apparently ate up their inheritance.   

A Slithery Reason Why It's Important to Have a Will

Here’s another one to add to the long list of problems that can arise when you die without a will: your family members might start fighting about what happens to your reptile collection. 

This is the issue that has plagued the estate of Karel Fortyn.  Mr. Fortyn died in early May of this year and was survived by his brother, his fiancée, and his common law spouse of 27 years from whom he had recently separated.

Chief amongst Mr. Fortyn’s personal effects was a collection of some 200 reptiles he kept in his Welland, Ontario home, including 150 venomous snakes and two very large crocodiles.  He owned the Seaway Serpentarium, which he had been operating from his house with the animals in enclosures.

After Mr. Fortyn’s death, a dispute erupted over who would decide the reptiles’ fate.  Pursuant to the intestacy rules in the Succession Law Reform Act, Mr. Fortyn’s brother is the sole residual beneficiary of the estate. However, his former common law spouse owned the house where the Serpentarium was located and believed that this gave her the authority to decide what to do with the animals. She donated them to the Indian River Reptile Zoo a couple of days after Mr. Fortyn’s death.  However, the Welland Humane Society seized control of the home a day later. 

Earlier this week the matter came before the Superior Court of Justice in Welland, and Justice Maddalena ruled that Mr. Fortyn’s brother has the authority to decide what happens to the reptiles.  Maddalena J. further ruled that the crocodiles should be removed from the Serpentarium as soon as possible and the balance of the animals should be removed within the next 21 days. 

Apparently, Little Ray’s Reptile Zoo in Ottawa will receive the non-venomous reptiles while Reptilia Zoo in Vaughan while receive the venomous reptiles. It is not yet clear what will happen to the crocodiles.   

5 Biggest Mistakes Trustees Make

Barron’s, the weekly newspaper in the United States, recently published a list of the five biggest ways that trustees botch their roles.  These are issues of which every executor or trustee should be mindful. 

According to Barron's, the most common mistakes are as follows:

  1. Not keeping proper records – a trustee has an obligation to be able to account to beneficiaries for her administration of assets and not being able to do so can lead to personal liability on the part of the trustee.
  2. Not diversifying investments – sometimes trustees don’t carefully consider the investments being made with trust assets and when this happens, and those assets decline in value, the beneficiaries will often blame the trustee.  In Ontario, trustee investment powers are set out in s. 27 of the Trustee Act.
  3. Not being even handed toward the beneficiaries – when there is an ongoing trust, there are usually two classes of beneficiaries – the income beneficiaries (who have a current interest) and the capital beneficiaries (who have a remainder interest).  As I discussed in a previous blog, unless specifically provided for in the will, the trustee has the obligation two treat both classes fairly.  
  4. Not understanding the laws relating to trustee compensation – while trustees are entitled to compensation, there are rules regarding how much can be taken and when it can be taken.   
  5. Not understanding the legal risks involved with being a trustee – it is important to remember that when things go wrong with the administration of an estate a trustee can be sued by the beneficiaries.

There’s a 6th mistake I frequently see executors make that can cause big problems: ignoring (or not understanding) the terms of the will or trust and the obligations those terms impose on the trustee.  Even when the will seems clear on its face, it’s a good idea for a trustee to show it to a lawyer – it’s not uncommon for a trustee to not know what she doesn’t know. 

Who Administers the Estate When There's No Executor?

Last week I blogged about an executor’s ability to renounce his appointment if he doesn’t want to act, which leaves an important question – who administers the estate where there’s a will and no executor willing or able to act?  A similar question arises where the deceased dies without a will (an “intestacy”), meaning there was no one named as executor.   

Where the deceased died with a will, she may have named an alternate executor.  In this case, that individual has the authority to act.  However, where there is no one named as alternate executor (or there was no will to begin with) the court must appoint one. 

Section 29(1) of the Estates Act provides the court with the authority to appoint an estate trustee where this is an intestacy or where the executor named in the will cannot act. Specifically, s. 29(1) allows the court to appoint the deceased’s (a) spouse/common law partner; (b) next of kin; or (c) spouse/common law partner and next of kin.  Where there are more than one individual “equal in degree of kindred” asserting rights as next of kin, the court has the authority to appoint more than one person.       

The general practice of the courts has been to prefer the spouse/common law partner’s right to the appointment over that of the next of kin.  However, this is not an absolute rule – in Mohammed v. Heera, Justice Warkentin noted that while there might be a “usual” order of priority when determining who should receive the appointment as estate trustee the court maintains an unqualified discretion.  This means that the ultimate decision is that of the judge alone. 

The practical reality is, as noted above, that where the deceased is survived by a spouse, the court will appoint the spouse unless there is good reason not to do so. 

Help! I Don't Want To Be The Executor!

Being named as an executor can be an honour – it’s a sign that a friend or family member trusted you enough to administer her estate.  However, it’s also a lot of hard work…and for some it’s just not worth the headache.  No one can be forced to be an executor and a named executor who does not wish to act and has not yet administered the estate can renounce the appointment.  

While an executor who wants to renounce her appointment isn’t required to provide an explanation, some of the more frequent reasons include: lack of time, a conflict of interest (e.g. the executor has a claim against the estate), a bad relationship with the beneficiaries, the estate is insolvent, or there will be litigation involving the estate.  

Whatever the reason an executor has for renouncing, the renunciation must occur before probate has been granted (and should occur before the executor has started to administer any assets – or the executor may be said to have “intermeddled” with the estate). 

So, how does an executor renounce?  This can be done by completing a renunciation (which is form 74.11 under the Rules of Civil Procedure and officially called a “Renunciation of Right to a Certificate of Appointment of Estate Trustee (or Succeeding Estate Trustee) With a Will”).

If probate has been granted and an executor wishes to step down, it is still possible; however, it is a little bit more complicated (and time consuming).  A court application must be commenced under s. 37(1) of the Trustee Act and the court must order the removal. 

Any executor applying to court for removal should give serious consideration to also passing accounts or, alternatively, providing estate accounts to the beneficiaries and obtaining a release – an executor’s liability for her administration of an estate isn’t automatically “waived” with a removal order.    

How Long Can an Executor Wait to Distribute an Estate?

The general rule in estate administration is that an executor has twelve months to realize the assets of an estate (referred to as the “executor’s year”).  However, the terms of a Will often give the executor the discretion to determine when and how to liquidate the estate.  The recent decision of the Supreme Court of British Columbia in Hriczu v. Mackey Estate considers how long the executor might have.

Here, the deceased died in 2000 leaving a will dividing the residue of her estate in equal shares between five relatives.  The main asset of her estate was a piece of land. By 2011, the land remained unsold. 

One of the beneficiaries (the plaintiff) who had previously agreed to hold the land decided she wanted it sold.  She was living in impoverished circumstances and wished to receive her inheritance.  When the executor refused, the plaintiff commenced an action seeking, amongst other things, an order that the land be sold. 

The executor (with the support of the other beneficiaries) argued that the wording of the Will provided him with wide discretion to determine how and when to convert the estate (as well as giving him the discretion to postpone conversion).  He further argued that the court should not interfere with the discretion given to him under the Will unless it was clear that the executor had breached his duties.    

Justice Beames, the trial judge, determined that, pursuant to the Will, the executor had been given broad discretion to postpone converting the assets of the estate and so long as the discretion was exercised in a way that was honest, reasonable, intelligent, and in good faith the executor was behaving appropriately. 

While Beames J. found that the executor was not entitled to postpone converting the land indefinitely, she also found that this was not the case here – the executor had provided evidence that he did intend to convert the estate but had decided that it was not yet advantageous to do so. 

Accordingly, Beames J. dismissed the plaintiff’s claim and ordered that costs be paid from the plaintiff’s share of the estate. 

What is Abatement?

A few weeks ago I blogged about what happens when a deceased’s debts exceed the value of the estate.  However, sometimes a problem that arises is that there is enough in the estate to discharge all the debts – but not to satisfy all the gifts made in the will.  So, what then?

When the assets of an estate are insufficient to satisfy the gifts set out in the will, the gifts are said to “abate” – meaning, the value of the gifts is reduced to the extent that a shortfall exists. 

Not all gifts will necessarily abate – rather the type of gifts provided for in the will determines the order in which abatement occurs.  The order of abatement is as follows:

  1. Residuary personalty;
  2. Residuary real property;
  3. General legacies (including pecuniary bequests from the residue);
  4. Demonstrative legacies (i.e bequests from the proceeds of a specific asset or fund, such as a bank account, which does not form part of the residue);
  5. Specific bequests of personalty; and
  6. Specific devises of real property. 

The assets at each level will abate until exhausted, after which assets at the next level will start to abate. 

It’s important to note that the order of abatement is a general rule and it is subject to an contrary intention expressed in the deceased’s will.  However, the abatement rules are important to keep in mind when doing estate planning – particularly when different classes of gifts are being made in a will. 

It’s worthwhile to raise the possibility that, at death, a client’s debts might result in the estate being insufficient to fulfill the gifts made in the will – and ensure that, if this occurs, the client is comfortable with the gifts being reduced according to the usual order of abatement.

Who Has to Pay a Deceased Person's Debts?

A few months ago, I blogged about rising debt amongst the elderly and the fact that a surprising number of people weren’t worried about repaying it while alive.  So, what ends up happening with the debt?

An individual’s debts don’t just disappear when he dies – they remain outstanding and need to be paid before the estate can be distributed.  A trustee has the obligation to identify the deceased’s liabilities and discharge them. However, there are times when a deceased’s assets are insufficient to cover the outstanding debts. Then what?

If there isn’t enough money in an estate to cover all the debts, then the estate will be insolvent.  The funds that are available will go toward payment of the debts, but the debts won’t be paid in full.  It is important to understand, however, that payment of debts takes priority over the rights of the beneficiaries to their inheritance – this means that the beneficiaries aren’t entitled to receive anything until the debts have been discharged and if the estate funds aren’t sufficient to pay the debts then the beneficiaries get nothing.

It is also important to understand that the obligation to pay the debts falls to the deceased’s estate.  The deceased’s family members are not responsible for kicking in funds if the estate is insolvent and the executor isn’t required to reach into her own pocket either. 

Unfortunately, debt collectors don’t always see things that way.  A couple of years ago, the New York Times reported that some collection agencies had taken to calling the deceased’s next-of-kin and imploring them to pay outstanding bills, even though they had no legal obligation to do so.  If this happens, it’s generally best to stand your ground – unless you co-signed for the debt or have received money from an estate before the debts were discharged, there’s no reason to pay.  

With An Executor Like This Who Needs Enemies?

Over this past weekend, the Globe and Mail published the much read article “The Dark Side of Canada’s Inheritance System”.  The article detailed the unfortunate administration of Paul Penna’s estate.  Penna died leaving a $24 million estate, mainly to charity.    

The Penna Estate has resulted in long standing and most unfortunate litigation in Toronto.  In brief, Mr. Penna died in 1996.  In his will, he appointed three trustees, one of whom was his friend, Barry Landen [“Landen”].

In the context of a blog, there’s no way to be concise about the large scale litigation involving Mr. Penna’s estate. However, Landen has been accused of looting Mr. Penna’s estate to the tune of millions of dollars; ignoring the terms of Mr. Penna’s will (which included valuable bequests to charities); being completely unable to account for missing assets from Mr. Penna’s estate; and donating funds to a charity not named in Mr. Penna’s will (while the charities named in Mr. Penna’s will have gone without). 

While Landen has not yet been fully called to account for the missing millions, the Honourable Madam Justice Greer had no patience whatsoever when Landen failed to adhere to numerous (and long standing) court orders, including those requiring Landen to disclose estates assets and what had become of them. 

Greer J. eventually found Landen in contempt of a number of court orders and sentenced him to 14 months in jail.  In her decision, Greer J. noted that Landen “perpetuated a massive fraud in his administration of [Penna’s Estate]”, found that Landen “deliberately, knowingly, and improperly” removed funds from an account frozen by the court, and remarked that “Landen’s sociopathy is such that all his actions appeared to be a deliberate course of greed”. 

Charming!

Ironically, over the past week, the New York Times published an article, “Choosing the Right Executor for Your Estate”.

Worried About Being an Executor? Then Buy Insurance!

I recently came across the website for ERAssure, an Ontario-based company which bills itself as the “only errors and omissions insurance available for estate trustees.”  The purpose of the insurance is to insure executors from personal liability and legal fees that might arise as a result of their negligent administration of an estate.

The coverage territory in Canada and the insurance will cover estates with a value of up to $5 million.  The premiums for the policy will depend on the size of the estate and the extent of the coverage.  While the policy will cover most negligent acts by an executor, there are limits – fraudulent, dishonest, and malicious acts are excluded from coverage. 

The policy is available for estates with more than one executor.  However, it must cover all of them – and it will not cover cross-claims between executors.  

It’s notable that an executor can’t purchase a policy directly.  Instead, law firms have to register with ERAssure and then apply for coverage for an executor client.  However, the website specifies that the company waives any right to subrogation against the estate solicitor, provided that the lawyer wasn’t involved in fraud or disciplined by the law society in relation to the matter and cooperates in the investigation of the claim.  I would be interested to know many lawyers have registered with this service.

I noticed that in a couple of places on the ERAssure website, it says that executors can usually pay for a policy of this nature from the estate assets. Personally, I would warn an executor against doing that.  Given the purpose of the policy is to insure the executor from personal liability for negligence, I think it would be difficult to justify why it is properly an expense of the estate. 

What's the "Even Hand Rule"...and When Might it Apply?

When discussing a trustee’s obligations, the duty to be “even handed” is often mentioned.  However, it’s not always clear what the duty entails. 

The even hand rule is sometimes described as an executor or trustee’s obligation to treat all the beneficiaries of an estate/trust equally.  However, this isn’t quite accurate – sometimes, under a will/trust, beneficiaries will have different types of interests (e.g. one beneficiary receives a car, the other beneficiary receives the residue of the estate) – and the nature of those interests might dictate differential treatment.

A trustee’s duty to be even handed is perhaps better described as the duty to ensure that: (1) the beneficiaries receive what they are entitled to under the terms of the will/trust; (2) one beneficiary does not receive an advantage or bear a burden that other beneficiaries with the same interest do not receive/bear; and (3) the trustee is acting impartially. 

A trustee’s obligation to be even handed can be effected by the terms of the will/trust.  There are some situations where a trustee might be given discretion to prefer the interests of one beneficiary to the expense of others (such as when there’s a testamentary trust and the trustee has the discretion to pay capital of the trust to the benefit of an income beneficiary). 

Still, even when a trustee has certain discretions, the even hand rule might nevertheless apply.  Cullity J’s decision in Edell v. Sitzer includes a very helpful discussion of the impact that discretionary powers have on the even hand rule.  

There are also situations where the terms of a will (or trust) are such that the trustee’s obligation to be evenhanded is completely ousted.  Pattillo J’s recent decision in the Primo Poloniato Grandchildren’s Trust is an example of when that might occur.

In any event, the application and scope of the even hand rule is complex and can often cause confusion.  A trustee who is concerned about her obligations in this regard is strongly advised to seek advice – making a wrong decision can result in personal liabilty on the part of the trustee. 

New York Court Finds Canadian Gay Marriage Valid in Probate Case

An appeals court in New York has ruled that the surviving spouse in a same sex marriage that took place in Canada could inherit the estate of his deceased husband.

In Re Estate of H. Kenneth Ranftle, the deceased and his partner were American residents who married in Canada in June 2008.  In August 2008, the deceased made a will in which he made bequests to his goddaughter and three brothers, and left the residue of his estate to his spouse, who was also named as executor.  Unfortunately, the deceased died three months later, in November 2008. 

The surviving spouse applied for probate in December 2008 and it was granted in January 2009.  When granting probate, the court declared that as the surviving spouse would be the only one entitled to the residue of the estate (whether there was a will or not), notice of the probate proceeding did not have to be granted to anyone. 

Apparently one of the deceased’s brothers had been considering challenging the will.  He objected to the court’s order that notice of the probate proceeding did not have be given to anyone on the basis that the Canadian marriage was not valid in New York because it would violate public policy.  He argued that, as a result, he had a financial interest in the estate as an intestate heir and was entitled to notice of the probate application so he could file an objection. 

The court rejected the brother’s argument.  In New York, there is a “marriage recognition rule” that provides that marriages that were valid in the place where they were celebrated should be recognized as valid in New York unless (1) the marriage is contrary to the prohibitions of natural law; or (2) it violated statute. 

Here, the court found that same sex marriage did not violate natural law and that although same sex marriage wasn’t legal in New York, in the absence of an express statutory prohibition the marriage recognition rule applied. 

Who Plans the Funeral When There's No Named Executor?

One of the obligations of an executor is to arrange for the deceased’s funeral and burial.  However, it is not uncommon for an individual to die without a will, leaving no one with the legal authority to dispose of the deceased’s remains.  Sometimes this isn’t a huge issue – the deceased’s next of kin agree on the manner of burial.  However, when they can’t agree, problems can arise.

This was the situation in the recent decision of Buswa v. Canzoneri.  By way of background, the deceased died unexpectedly without a will, and was survived by seven siblings (who were the applicants in the proceeding).  After the deceased’s death, an individual came forward alleging that she was his daughter (this was denied by the siblings). She was the respondent in the proceeding.   

Unfortunately, a disagreement arose over the proper burial of the deceased’s remains.  The deceased was a member of the Whitefish River First Nation, as were his siblings (the applicants) and they wanted him to be buried in accordance with traditional Anishnabek practices.  The respondent argued that at the time of his death the deceased was no longer an adherent to the Anishnabek belief system and had wanted to be cremated. 

The applicants brought a motion seeking the appointment of an estate trustee during litigation for the limited purpose of disposing of the deceased’s remains.  S. 29(1) of the Estates Act provides that where there is no will naming an executor, the court has the discretion to appoint (a) the deceased’s spouse/common law partner; (b) the deceased’s next of kin; or (c) the partner and the next of kin. 

Although “next of kin” is not defined in the Estates Act, Justice Stinson (the motion judge) considered definitions of the term found in various legal texts and determined that it referred to the person most closely related to the deceased.  Stinson J. then considered whether he was satisfied that the respondent was the deceased’s natural child. 

While there was no DNA evidence and the deceased and the respondent did not meet until 2008, Stinson J. found other evidence to suggest a father/daughter relationship (such as that the deceased had signed a statutory declaration that he was the respondent’s father).  He decided that on a balance of probabilities  the respondent was the deceased’s natural daughter.

Stinson J. then concluded that as the deceased’s natural daughter, the respondent qualified as his “next of kin” and, accordingly, appointed her as estate trustee during litigation for the purpose of dealing with the deceased’s remains.     

What Happens to Your Air Miles When You Die?

Many individuals are members of various rewards programs.  It’s not unusual to collect a significant number of air miles (or other rewards points) – and they can be very valuable (I have one friend who has accumulated enough air miles to fly round trip to Australia in business class – three times!).  

Each rewards program will have its own policies regarding whether points can be transferred on a member’s death.  For example, here’s a chart that was published by AirFareWatchDog.com in 2009 listing the rules of the major US carriers.  For the Canadians out there, Aeroplan’s policy can be found here and Air Miles’ policy can be found here

The short and the long of it is that while most major points programs will allow a transfer (usually to immediate family), typically there will be a surcharge – most often, this is a specific amount per point/mile.  Note, however, that most plans do not allow the points to be converted to cash and paid out to an executor. 

It’s always a good idea to consider gifting the rewards points in a will.  While this might, at first glance, seem like a silly suggestion, as noted above those points can be very valuable.  I am not joking when I say I have seen fights erupt between family members over who gets the air miles of a deceased relative…on more than one occasion! 

Besides avoiding fights over who gets the points, including them as a specific gift in a will can help avoid a valuation fight between beneficiaries in the event that a residual beneficiary wishes to receive the points as part of his inheritance (and, yes…I’ve seen that one, too!). 

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!

Tips for Avoiding Real Estate-Related Negligence Claims

It’s not unusual for lawyers practicing estates and trusts law to also practice real estate law (providing they've complied with the provincial and insurance requirements).  This might occur when a lawyer is acting as estate solicitor (representing the estate trustees on the administration of an estate) or is representing a party during estate litigation and one or more of the assets is real estate. 

Real estate law can be a tricky (and liability filled) business. An article in the December edition of LawPRO Magazine, published by LawPRO, the liability insurer for lawyers in Ontario, discusses some of the most common reasons behind malpractice claims involving real estate transactions.

As the article points out, real estate law gives rise to the second highest number of negligence claims against lawyers in this province (civil litigation is number one) – and that number is rising.  Over the past decade, real estate-related claims have amounted to nearly 30% of the claims LawPRO sees.

Amongst the most common errors cited are the following:

  1. Lawyer/client communications failures (such as failure to inform a client or follow a client’s instructions);
  2. Inadequate investigation or discovery of facts (such as misreading a survey or not obtaining a title search);
  3. Failing to know or properly apply the law;
  4. Clerical and delegation errors (such as over-delegating to a law clerk or failing to review real estate documents for clerical errors); and
  5. Time and deadline-related errors. 

As the article points out, it’s never possible to completely eliminate the possibility of a negligence claim.  However, good client communication, attention to detail, and careful documentation can go along way towards reducing the risk.

If a lawyer becomes aware of a potential claim, it’s absolutely essential to advise LawPRO quickly (even if negligence hasn’t been alleged).  Reporting a potential mistake to LawPRO is never fun – but not nearly as "unfun" as LawPRO discovering the lawyer was well aware of the potential claim and delayed reporting it!

For more information on professional negligence, please see my blog from September on avoiding claims for estates and trusts lawyers.  Additionally, LawPRO publishes the “Avoid a Claim” blog which is a fantastic resource!

What's a Spouse's Entitlement When There's No Will?

When an individual dies without a will (an “intestacy”), the law dictates how his or her estate is to be divided.  For today’s blog, I want to address what entitlement the surviving spouse might have.  

When determining what a spouse is to receive, the first question to ask is whether the couple was legally married or not.  In a previous blog I did about the author Stieg Larsson’s estate, I discussed what rights a common law (i.e. unmarried) partner might have.  So, here, I’m going to focus on the entitlement of a surviving married spouse.

Part II of the Succession Law Reform Act ("SLRA") governs intestate succession.  When an individual dies and is survived by a spouse and no children, then the surviving spouse (“survivor”) is entitled to the entire estate. 

When there are children, the survivor is entitled to receive the “preferential share” of the estate (in Ontario, this is currently $200,000) – everything over and above the preferential share is then split between the survivor and the deceased's children (when there is one child, the survivor and the child split the excess 50/50; when there is more than one child, the survivor receives 1/3 of the excess and the children split the remainder).  

The survivor also has rights under s. 5(2) of the Family Law Act (“FLA”), which provides that where the deceased’s net family property exceeds that of the survivor, the survivor has the right to equalize net family property.  Note, however, that the survivor must choose whether to equalize under the FLA or inherit under the SLRA – he or she can’t do both.     

Finally, in situations where it appears that neither an equalization of net family property or an inheritance pursuant to the intestacy rules will be sufficient to meet the survivor’s financial needs, he or she might have a claim for dependant relief under Part V of the SLRA

Word to the wise – claims under both Part V of the SLRA and s. 5 of the FLA carry tight limitation periods (for example, the right to elect under the FLA expires six months after the deceased's death).  Accordingly, in situations where either might apply, the survivor should seek legal advice soon after the deceased’s death.

Some Taxing Issues Surrounding Executor's Compensation

The trusts and estates section of the Ontario Bar Association has a monthly “brown bag lunch” where estates and trusts lawyers in the province discuss various estate-related issues.  At yesterday’s lunch, a topic discussed was the tax rules relating to executor’s compensation. 

Most estates and trusts lawyers will be aware of the Canada Revenue Agency’s position that executor’s fees are to be treated as either income from office, employment, or business (depending on whether the executor acts in that capacity in the regular course of business).  In other words, the compensation received must be included in the executor’s income for the year and will be taxed accordingly. 

The issue of how the income is treated is of some importance – in situations where the income is from a business, the deductions allowable will be far more extensive than if the compensation is treated as income from employment or an office.

It is also important to consider the application of s. 153(1) of the Income Tax Act.  It provides that when a taxpayer’s income is from employment or an office, the person paying the income (in the context of an estate, this would be the executors) must withhold the amounts set out in the Income Tax Regulations.  When the executor is an employee the compensation received will be subject to CPP (and, in some circumstances, EI). 

It is important that any executor who wishes to receive compensation ensures that she is aware of the associated tax obligations and what amounts must be withheld.  It will often be prudent to seek advice from an accountant because confusion about tax liability is always best avoided - in situations where the appropriate amount is not withheld and remitted, the executors of an estate can become liable for interest, penalties, and the amount owing.  

When Might a Court Deny a Successful Party its Costs?

In the context of contentious litigation, the successful party will frequently seek its costs against the unsuccessful party.  The court enjoys wide discretion in determining how costs of a proceeding should be apportioned.  While the usual rule is that the “loser pays”, as evidenced by Justice Lederer’s costs endorsement in Watson Estate v. Beatrice Watson-Acheson Foundation, this will not always be the case.

The Watson Estate had involved several court proceedings.  In 2006, Low J. had ordered the removal of one of the three executors and ordered that the executor pass accounts.  In doing so, she was also quite critical of the conduct of the other two executors.  On the removed executor’s application to pass accounts, Lederer J. ordered that she repay executor’s fees that she had previously received.

The residual beneficiary of the estate (which was a foundation) then asked that its legal fees for the passing of accounts be paid by the executor.  S. 131(1) of the Courts of Justice Act provides that the issue of costs is in the discretion of the court and the court may determine by whom and in what amount costs must be paid. 

The residual beneficiary pointed to cases which held the successful party to a proceeding could expect to be awarded costs and argued that this served to narrow the court’s discretion.  Lederer J. disagreed with this and held that being a successful party does not automatically lead to an entitlement to costs.

Here, Lederer J. determined that there should be no award as to costs. Specifically, he found that one of the remaining executors (who was a director of the foundation that was the residual beneficiary) had also played a significant role in the problems with the administration of the estate and ill will that developed between the executors.  Lederer J. also found that the foundation had relied on that executor’s behaviour and, as such, could not separate itself from it when seeking costs. In this situation, he determined that if he awarded costs then he would be compensating a party who contributed to the very problems to which it later complained and declined to do so.  

When Should the Court Appoint a Monitor?

The recent decision of Justice Quinn in the D’Angelo Estate considers the interesting question of whether the court has the authority to appoint a monitor to oversee the administration of an estate. 

By way of background, the deceased died leaving a will in which he named as executors two individuals residing in New York.  As foreign executors, they were obliged to post a bond in order to obtain probate; however, the insurer, being concerned that the executors’ assets were considerably less in value than the deceased’s estate, advised that it would only issue a bond if a member of the estate solicitor’s law firm was appointed by the court as a monitor. 

The executors brought a motion for assistance under R. 74.15(1)(i) of the Rules of Civil Procedure seeking the appointment of a monitor.  R. 74.15(1)(i) permits any person appearing to have a financial interest in an estate to move for an order seeking the court’s direction on issues relating to the administration of an estate. 

Quinn J. noted that while the court has very limited discretion when it comes to granting probate, it enjoys wide discretion when determining whether to attach conditions to the grant.  While the appointment of a monitor is very unusual, he found that the court does have the discretion to do so (an appointment of this nature occurs with the most frequency in commercial disputes). 

Although Quinn J. was satisfied he had the discretion to appoint a monitor, he pointed to the fact that the role of monitor was extremely ill-defined.  He determined that a monitor could be classified as an “officer of the court” (which, again, is not the most well defined concept). However, in this particular case, he found that the duties of the monitor would be to (1) monitor the co-executors; (2) ensure the estate was administered properly; (3) comply with the terms of the order of appointment; and (4) be otherwise “faithful to the responsibilities of an officer of the court.”

Accordingly, he allowed the appointment of the monitor.   

In the Days of Auld Lang Syne, Robert Burns Died Intestate

In North America and the United Kingdom, many will ring in the New Year by singing “Auld Lang Syne”.  Canadian band leader Guy Lombardo is generally credited with popularizing the use of the song on New Year’s Eve in North America back in the first half of the 20th century. However, the song had already been popular in Scotland for about 150 years and actually originates from a poem written by Scottish poet Robert Burns in 1788. 

Burns was born in Alloway, Scotland in 1759.  Initially a tenant farmer, he rose to prominence through the publication of his poems and songs during the 1780s.  His health started to fail while he was relatively young and he died in 1796 at the age of 37.  He was survived by his wife, Jean Armour, and his five children (one of which had resulted from a tryst with his mother’s maid).

Like far too many, Burns did not give the appropriate priority to estate planning and died without a will.  It was left to his widow, Jean, to administer his affairs.  A testament dative for his estate can be found in the Dumfries Commissary Court records – this is not a will but rather a court order in Scotland appointing and confirming an executor when an individual dies without a will.  Apparently, there were debts owing to Burns’ estate and to collect them his widow required the authority to act as his personal representative.  An online version of the testament can be found here, here, and here.

Of additional interest is the “State of Gilbert Burns’ Acceptance to Mr. Burns’ Estate” (Gilbert was Burns' brother).  It indicates that after Burns’ death, a plan was devised to raise money to support his family by publishing a four volume edition of his complete works.   It also indicates that the estate paid an annuity to Burns’ mother.  His daughter with the maid doesn’t seem to have ended up all that lucky – the estate appears to have supplied her with a year of “room, board, and washing”. 

Have a safe and happy New Year’s Eve and a wonderful New Year!

When Can the Public Guardian & Trustee be Appointed as Estate Trustee?

The recent decision in Baranek Estate reviews the circumstances under which the Public Guardian and Trustee ("PGT") should be appointed as estate trustee of an estate. 

By way of background, prior to the deceased’s death, his former attorney for property had commenced an application to pass accounts.  Subsequent to the deceased’s death, it was not immediately apparent whether he had a will; as such, the attorney brought a motion to appoint a lawyer as litigation administrator of the estate, pursuant to R. 9.02 of the Rules of Civil Procedure, so the application could be continued. 

The PGT opposed the appointment, and instead asked that it be permitted to apply to be estate trustee, pursuant to s. 1 of the Crown Administration of Estates Act (“the Act”).  Specifically, s. 1(1) of the Act allows the court to appoint the PGT as estate trustee when an individual who dies in or is a resident of Ontario does not leave a will (or does not name an executor) and there are no known adult next of kin who are willing or able to administer the estate. 

Justice Brown, the motions judge, found that in this case it was unclear whether the conditions that would permit the PGT’s appointment under s. 1 had been met.  Specifically, he found that on the evidence it appeared that the deceased may have had a will and, as such, there might be an executor out there somewhere. 

Accordingly, Brown J. determined it would be premature to appoint a litigation administrator or authorize the PGT to apply for probate.  Instead, he adjourned the motion and ordered the PGT to make such investigations as were necessary to ascertain whether an estate trustee of the estate existed and, if not, to determine whether it intended to apply for the appointment.    

Will or No Will: When Are Handwritten Changes Valid?

When enterprising individuals try doing their own estate planning, things can get dicey – but when they start trying to mess with professionally completed estate plans, it can end up being a real disaster!  In the recent decision of Gibbon Estate v. Sleeping Children Around the World, the court had to determine what constituted a creative do-it-yourselfer’s valid last will and testament. 

The deceased had made a handwritten will in 1989 that was attested by two witnesses.  In 1994, she executed a formal will which was prepared by a lawyer, although she later made handwritten changes to it.  Sometime after the 1994 will was made, she made a number of handwritten alterations on the 1989 will. 

The 1994 will contained a standard revocation clause (which revoked all prior wills).  The issue that arose was whether the handwritten notations made on the 1989 will after the 1994 will had the effect of “reviving” the 1989 will. 

Section 19(1) of the Succession Law Reform Act provides that a will which has been revoked is revived only by:

  • A will made in accordance with Part I of the SLRA (which relates to testate succession);
  • A codicil made in accordance with Part I of the SLRA which shows an intention to give effect to a previously revoked will; and
  • The re-execution of the revoked will with the required formalities. 

Justice Stinson, the application judge, determined that the issue was whether the handwritten markings amounted to a codicil.  In order to qualify as a holographic codicil, the document must conform to s. 6 of the SLRA and be entirely in the testator’s own handwriting and signed by the testator.

In this situation, while the deceased initialed some of the changes to the 1989 will, she did not sign any of them.  As such, Stinson J. decided that the alterations did not amount to a valid codicil and, accordingly, did not revive the 1989 will.

Stinson J. then considered the markings on the 1994 will.  He found that as they were entirely in the handwriting of the deceased and had been signed by her they qualified as a codicil.  Accordingly, he found the 1994 will as amended by the handwritten codicil to be the deceased’s valid last will and testament.

...it would have been so much easier if she’d just seen a lawyer!      

When Should the Court Approve a Sale by an Executor?

The recent decision of Jochem v. MacPherson addresses the circumstances under which the court should approve a sale transaction made by an executor. 

By way of background, the applicant was one of four executors of the deceased’s estate.  The other three executors were the applicant’s children. The applicant, as an executor of the estate, accepted an offer to sell shares the estate held in a privately-owned company to a corporation owned by her son (who was also an executor). 

The applicant then brought an application seeking a declaration that she had acted within her discretion and in accordance with her fiduciary duties when accepting the offer and an order approving the transaction. 

Justice Hoy set out the test that the court should apply when determining whether to approve a sale transaction.  Specifically, the court must be satisfied that the sale price is the “best which can be obtained” and that the sale is in the best interests of the beneficiaries.  In seeking court approval, the trustee has an obligation to obtain and put before the court all the material appropriate to allow the court to make the determination sought. 

In this situation, Hoy J. had significant concerns about the sale of the shares, including the following:

  • The applicant did not consult the other executors about the selection of the valuator of the shares or the parameters of the valuation;
  • A number of the valuator’s underlying assumptions appeared questionable;
  • The valuation was a “limited exercise” and the information used appeared to have been received, in part, from the prospective purchaser of the shares;   
  • No attempts had been made to sell the shares on the open market and alternate purchasers had not been sought; and
  • The other executors were neither consulted with nor informed of any discussions regarding the sale.

While the proposed purchase price was the appraised value of the shares, given the limitations of the valuation and the material before the court, Hoy J. was not persuaded that the applicant was acting in accordance with her fiduciary duty.  She was also unconvinced that the offer was the best price that could be obtained.  As a result, Hoy J. declined to approve the sale of the shares.  

How to Probate a Will with No Affidavit of Execution

Section 4 of the Succession Law Reform Act provides that for a will to be valid, it must be signed in the presence of at least two witnesses and that those witnesses must witness the will in front of the testator.  What is sometimes forgotten (or just not known) is that in order to obtain a certificate of appointment of estate trustee with a will, the executors are required to prove that the will was duly executed. 

Rule 74.04(1)(c) of the Rules of Civil Procedure (“the Rules”) provides that when applying to probate a will, the executors must submit an affidavit of execution of the will (and of every codicil, where applicable) or, when one does not exist and neither witness can be found, provide “such other evidence of due execution as the court may require.”

Things are easiest where an affidavit of execution (in which a witness swears that he or she was present when the testator signed his will) exists. An affidavit of execution should be in Form 74.8 of the Rules (and note that the affidavit must be commissioned by a commissioner of oaths).

In situations where no affidavit of execution can be found at the testator’s death, then attempts should be made to locate one of the witnesses to the will so that an affidavit of execution can be sworn.  Sometimes, however, the witnesses have died or cannot otherwise be located.  In this situation, the executors will need to find another method of establishing that the will was duly executed. 

The easiest way to do this is to contact the financial institutions where the deceased held assets.  Usually, when opening an account, an individual is required to fill out a signature card.  Where this has occurred, the bank manager (or other authorized officer) should be asked to swear an affidavit stating that he or she has compared the signature on the will with the signature on record with the bank and, accordingly, believes the signature on the will is that of the deceased.  Generally, the court will grant probate on this basis.          

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.

The "When, Who, and How" of Replacing an Executor

A couple of months back I blogged on the Court of Appeal’s decision in Gonder v. Gonder Estate, which found a court could only remove a trustee without appointing a replacement when there were mechanisms in place to protect the interests of the beneficiaries.  However, when a trustee is removed, resigns, or dies, it is usually preferable to appoint a replacement.    

When determining whether a new trustee is necessary, the first thing to do is to read the will (or trust agreement, as the case may be).  In circumstances where there are multiple trustees, the will may provide for the minimum number who must be acting.  Sometimes, when a trustee resigns or is removed, there are still enough remaining trustees that the minimum number is met, meaning the appointment of a new trustee is unnecessary.

If it becomes clear that a new trustee is necessary, the will should be reviewed to determine whether an alternate has been named.  If one has, then he or she is entitled to the appointment.  If no alternate has been named, and the trustee being replaced has died, the will of the deceased trustee should be reviewed to determine whether he or she nominated a replacement – s. 4 of the Trustee Act (the “Act”) permits the last surviving or sole trustee to appoint a successor by will. 

If no one has been named, then a new trustee is necessary – in some circumstances, it will be appropriate for one of the beneficiaries to be appointed; in others it might be preferable to seek the appointment of a trust company or professional, such as a lawyer or an accountant.

When it comes to actually appointing a new trustee, s. 3 of the Act provides for certain circumstances where the appointment can be made in writing by the surviving trustees.  Additionally, the court has the authority to appoint a replacement pursuant to s. 5 of the Act.   

Keeping Your Estate Administration-Ready

I frequently stress to my clients the importance of keeping their affairs in order. While this means keeping an up-to-date will there is much more to it than that.

The National Post recently ran a helpful article  on keeping your estate “administration ready” in case of your death. Here are the tips that I liked best:

1. Ensure your executors are up to the task

Selecting trustworthy executors is important, but there’s more to the choice than trustworthiness. Administering an estate can be complicated, time consuming, and stressful, particularly when the estate is complex. It is important that the executors have the knowledge and time necessary to administer the estate.

2. Notify the executors that they’ve been named and advise them of the contents of the will

I have seen numerous occasions where the first time an executor learns of his appointment is after the death of the testator. This can cause big problems – especially if the executor renounces the appointment and no alternate has been named.

Explaining the terms of your will to your named executors is also a good idea – it will be easier for them to communicate with the beneficiaries and determine how to make any necessary discretionary decisions.

3. Brief the main adult beneficiaries about the terms of your will

Estate litigation can occur when a beneficiary is unpleasantly surprised by the terms of a will. Being upfront with the beneficiaries during your life can help to stave off the shock and hurt feelings that can lead to infighting and litigation after your death.

4. Keep financial records in order

I always recommend that clients create (and keep updated) a list of assets, such as bank accounts and investments, and where those assets are located. Copies of insurance policies, other beneficiary designations, recent tax returns, and important financial records should also be kept in one place.

This will help to avoid the administration of your estate being delayed as executors search for assets or, even worse, certain assets never being recovered.

While it’s never possible to guarantee a smooth estate administration, the above suggestions will certainly make your executors’ lives easier.

Duties of an Estate Trustee: Administering an Estate within the 'Executor's Year'

A question I frequently get asked by clients is “how long should the administration of an estate take?” – often, beneficiaries, wanting to receive their inheritance, take to wondering, “what’s taking so long?” 

There exists at common law a “rule of thumb”, which provides that the executors of an estate have twelve months from the deceased’s death to call in the assets of the estate, pay debts and liabilities, and distribute the assets remaining to the beneficiaries in accordance with the provisions of the deceased’s will.  The rule exists as a reminder to executors that they can't unduly delay the adminitration of an estate - while also allowing them time to focus on the task at hand without worrying about having to make distributions to beneficiaries. 

If this is not accomplished within a year, the beneficiaries then have the right to demand interest on their gifts and can call upon the executors to explain why the administration of the estate is not complete. The Supreme Court of Prince Edward Island’s decision in Currie v. Currie & Ors provides a useful discussion of the rule. 

The rule isn’t completely inflexible - there are certainly circumstances where the administration of an estate will take longer than a year, such as when there is litigation involving the estate or the assets prove difficult to realize.  In addition, there are often clauses in a will which give the executors wide latitude in determining how and when to realize assets – and these can be relied on by executors who have been prudent in their actions when explaining why the administration of the estate is ongoing after a year.

In situations where it appears that, though no fault of the executors, the administration of the estate will continue past the one-year mark, I always encourage to executors to, where practicable, make an interim distribution to the beneficiaries – I find that beneficiaries who have received something are more inclined to be patient waiting for the rest of their inheritance. 

In addition, it is very important for executors to communicate with beneficiaries about the status of the administration of an estate.  I have seen numerous situations where executors, figuring that since they’re the ones in charge, believe that they have no obligation to provide explanations regarding their administration of the estate and beneficiaries, who would otherwise have shown patience, become suspicious of the executors when the administration of the estate becomes prolonged and the beneficiaries have no idea why.     

Can an Executor be Removed with No Replacement Appointed? Court of Appeal Says "Sometimes"

I recently came across the Ontario Court of Appeal’s decision in Gonder v. Gonder Estate, from March of this year.  In it, the court considers a very interesting issue: does the court have the discretion to remove a trustee without appointing a replacement and, if so, when should that discretion be exercised? 

By way of background, an individual ("the testatrix") left a will naming her sister and brother-in-law as her executors.  After the testatrix’s death, her brother commenced a claim against her estate. 

The executors later brought a motion under s. 37 of the Trustee Act seeking their removal on the basis of, amongst other things, financial stress, ill health, and other personal circumstances.  They did not seek the appointment of a replacement executor.  The testatrix’s brother opposed the motion, arguing that in the absence of a successor trustee, the current executors were “stuck with the job.” 

The motions judge ordered that the executors be removed and held that requiring them to continue acting would cause substantial hardship on them.  He further decided that s. 37 of the Trustee Act did not require the court to appoint a successor when removing an executor and found that an individual could not be compelled to act as a trustee.   

The testatrix’s brother appealed, arguing that the motions judge erred in removing the executors, leaving the estate with no personal representative. 

The Court of Appeal allowed the appeal.  It found that the motions judge was correct that the court does have the discretion to remove a trustee without appointing a successor.  However, this was to occur only in the rarest of circumstances.  It also found that when leaving an estate “trustee-less”, the court had the obligation to ensure “the proper administration of the estate in the best interest of the beneficiaries”.  That is, an alternate mode of administration must be implemented such that the estate assets will be maintained and the beneficiaries’ interests will be protected.

The court went on to conclude that while the circumstances were such that the removal of the executors was warranted, the motions judge erred in failing to ensure that the proper administration of the estate could proceed.  It ordered the Superior Court to reconsider the executors’ removal and, if they were to be removed, to ensure the estate and its beneficiaries would be protected. 

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.

Decisions, Decisions - Should You Make a Will or Avoid Tempting Fate?

If you ask any estate planning lawyer whether you should have a will, the answer will be a resounding “Yes!”.  However, Dorothy Lipovenko, a writer for the Montreal Gazette, might not agree.

In her recent article, “Why Tempt Fate By Making a Will?”, Ms. Lipovenko explains why she doesn’t have one (and, from what I can glean, doesn’t plan on making one).  Apparently, a major part of Ms. Lipovenko’s reluctance stems from superstition – the worry that making a will will somehow hasten her own demise.  Additionally, she figures that having named her husband the beneficiary on her RRSPs, further planning isn’t really necessary – especially since, although she’s accumulated “stuff” over her lifetime, asset-wise she’s hardy the “Queen of England”, as she puts it. 

The mentality expressed in the article isn’t an uncommon one.  In my practice, I often encounter clients who are very reluctant to do a will.  Frequent excuses include that they’re too busy, they can’t decide how to distribute their assets, they don’t have enough worldly goods to make a will worthwhile, and so on – although, I’ve noticed a consistent underlying theme is that people just don’t like thinking about dying.

Nevertheless, having a will is important.  If your assets are limited and your intended distribution is simple, then you certainly don’t need anything complex.  But turning your attention to how you want your estate divided and who you want to administer it is still important.  If for nothing else, having a will makes your estate much easier to administer because it will name the executor who will have the authority to act.  Dying without a will, and without having named an executor, can lead to a costly and arduous estate administration – and result in professional fees being incurred that could have otherwise been avoided. 

The New York Times recently published a helpful primer on the benefits of having a will, “Estate Planning Step 1: Recognize You Are Going to Die”, which is worth a read.

Welcome to the Toronto Estates and Trusts Monitor

I am pleased to announce the launch of my new blog.  I hope to update it often, so make sure to come back frequently to see what’s new. 

If you feel like sharing the content, the share link will allow you to post the blog on various social media sites, such as LinkedIn, Facebook, and Twitter or email it to others. 

I’m always happy to hear from my readers, so if you have any questions, comments, or topics you would like me to blog about, please feel free to email me using the enquiry form on the contact page.  

Have a great day!

Megan F. Connolly