How Does an Equalization of Net Family Property Work?

When someone dies, his surviving spouse isn’t necessarily bound by the provisions of the deceased spouse’s will (or the distribution scheme set out in the intestacy provisions in Part II of the Succession Law Reform Act).  In many circumstances, instead of taking an entitlement under a will or pursuant to the intestacy laws, the survivor has the option to trigger a property division scheme set out in in Part I of the Family Law Act (“FLA”) (referred to as electing to equalize net family property (“NFP”)). 

Before I go further, there are a few things I want to point out.  Firstly, the right to equalize NFP exists solely when the spouses were legally married – meaning that it is not an option available to common law spouses.  Secondly, the reason I say that an equalization is available in “many circumstances” is because it is possible to contract out of the option in a domestic (or separation) agreement.  Thirdly, if a spouse elects to equalize NFP then she releases her rights under the will (or the intestacy laws) – she doesn’t get to benefit under both.

An equalization of NFP is the same property division scheme that’s available when married spouses divorce (the difference being that, in the estates context, the triggering date is the date of the spouse’s death, rather than the date of separation).  In the case of the death of a spouse, it involves determining the value of the assets that each spouse acquired during the marriage.  If the value of the assets acquired by the surviving spouse is lower than the value acquired by the deceased spouse then the survivor (should she elect to equalize) in entitled to half the difference.  Believe me when I say that this explanation is incredibly simplistic!

Determining each spouse’s NFP can involve complex mathematics – because the FLA allows spouses to exclude various assets (both that they owned at the date of marriage and that they acquired during marriage) from the calculation – and at times determining NFP can be a highly contentious procedure.

It’s essential for any spouse considering whether to equalize NFP to know that the FLA imposes a deadline of 6 months after the death of a spouse to file an election (otherwise the spouse is deemed to take under the will – or intestacy rules).  The court has the discretion to extend time (and will frequently agree to do so in appropriate circumstances) – however, an extension should be sought prior to the limitation period elapsing, not afterwards.

Estates Lawyers...Don't Forget About Family Law

On Wednesday I blogged about will drafting and professional negligence issues that can arise for a lawyer.  I commented that “dabbling” in an area of the law can be a bad thing – however, knowing about another area of the law is a very good thing.  In its most recent Webzine, LawPRO (the professional insurer for lawyers in Ontario) discusses how estates and trusts lawyers can benefit from knowing a thing or two about family law.

When drafting wills, something that is often overlooked is the role family law has on an individual’s ability to dispose of his estate.  While it might be nice to think that when doing a will an individual can do whatever he wants with his assets, in many situations this is not the case and there are in fact legal limitations when it comes to disposing of assets. 

Some of the “hot button” issues that LawPRO raises include the following:

  1. Matrimonial home – in Ontario, a spouse can’t dispose of a matrimonial home without the consent of the other spouse – irrespective of who holds title to the property.  Keep in mind that that the definition of “matrimonial home” is broad and will frequently include a vacation property. 
  2. Child/Spousal Support – child and spousal support obligations are frequently binding on an individual’s estate – and not simply those obligations that arise by way of court order.  Often, domestic agreements and separation agreements will impose support obligations that should be considered when doing a will. 
  3. Dependant Support EntitlementPart V of the Succession Law Reform Act allows certain classes of people (including a spouse or child) to bring a support claim against an individual’s estate if the individual did not provide adequate provision for dependants in his/her will.  The right to bring a claim of this nature applies to former spouses – and can’t be “contracted out of” by a separation agreement.

LawPRO’s article includes a few other issues which are worth a review – and should be kept in mind by any lawyer drafting wills (as well as the litigators that come on to the scene post-death). And in a future blog, I'll comment on some of the issues that family law lawyers need to remember about estates law.

How Does a Separation Agreement Affect Your Estate Plan?

The effect that marital breakdown has on an estate plan is an issue that confuses many.  As I’ve blogged about before, a divorce will generally revoke a gift to a spouse and an appointment of the spouse as executor under a will; however, mere separation will generally have no impact at all.  But what happens when separated (but not divorced) spouses enter into a separation agreement?

The recent decision of Makarchuk v. Makarchuk addresses the impact of a waiver of rights to an estate in a separation agreement when there is also a will leaving an entitlement to the spouse.  In this case, the spouses were separated, but not divorced.

Six months before the spouses separated, the husband had a made a will naming his wife as his executor and as the sole beneficiary of his estate.  Subsequent to their separation, the spouses entered into a separation agreement that provided that “subject to any additional gifts from one of the [spouses] to the other in any will validly made after the date of this agreement” the spouses both released any rights they may acquire “under the laws of any jurisdiction in the estate of the other…” 

The husband later died and a dispute arose as to whether the wife was entitled to receive the estate pursuant to the husband’s will and act as executor.  Their son argued that the wife had no entitlement to the estate as the separation agreement acted as a waiver to any rights she might have. 

The wife argued that there were only three ways that the provisions in the husband’s will could fail: (1) through the husband making a new will; (2) through the husband marrying someone else; or (3) in compliance with the provisions of s. 15 of the Succession Law Reform Act (which sets out the formal requirements when revoking a will). 

Ultimately, Justice Hennessy found in favour of the wife.  She determined that the language in the separation agreement that referred to the release of “rights acquired under law” did not apply to those acquired under the husband’s will.  Accordingly, Hennessy J. found that the language in the separation agreement did not trump the wife’s rights under the will and the wife was entitled to take as the will provided. 

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).

Collaborative Law and Estate Disputes

An article in the latest edition of Canadian Lawyer magazine explores the question of why collaborative law has not caught on for estate disputes. 

For the uninitiated, collaborative law is a form of dispute resolution which is popular in family law matters.  The objective is to resolve disputes without invoking the court process.   The parties and their counsel all sign an agreement that they will not go to court and attempts are made to resolve the dispute through discussions, information-sharing, and mediation. 

The process is consensual, and the parties are permitted to withdraw from it at any time; however, if they do decide to litigate the dispute, the counsel involved in the collaborative process cannot continue to represent them.  The website for Collaborative Family Lawyers of Canada provides useful information on the approach. 

There have been initiatives to integrate collaborative law into the estates and trusts field but, so far, success has been limited.  A large stumbling block is the notion that if the collaborative process fails (and litigation ensues) the parties will need to retain new counsel. 

From a practical level, this is problematic because the estates and trusts bar is pretty small – this, combined with the fact that estates disputes often have numerous parties, would create complications if counsel were disqualified from a file. 

Another problem relates to situations where there are minor or mentally incapable beneficiaries, thus requiring the involvement of the Office of The Children’s Lawyer (“OCL”) or the Office of the Public Guardian and Trustee (“PGT”).  Both government agencies only have the authority to act once a legal proceeding has been commenced, which obviously creates problems if the premise of the collaborative approach is to avoid litigation.  Additionally, the potential disqualification of counsel if the approach is unsuccessful again becomes a problem – the OCL and the PGT are the only ones with the authority to represent minors and incapable persons, respectively.  

Recently, the Collaborative Estates Law Working Group was formed in Ontario, with the objective of elevating knowledge and understanding of the concept amongst lawyers and the public.   It will be interesting to see whether the collaborative approach starts to gain a stronger foothold – if it is to become more popular, it would seem the model will need to be adjusted to account for the unique challenges posed by estates and trusts disputes.  

Guardianship of Minors: Planning for Your Children's Future

A common concern that people have when planning their estates is what will happen to any minor children they have on their death.  As a result, people who do have minor children when making a will have the option of naming a guardian to take custody of their children on their death. The authority to appoint a guardian and the process that must be followed is set out in s. 61 of the Children’s Law Reform Act. 

It is possible to appoint more than one guardian or to name alternate guardians in the event the one appointed can’t act.  In situations where a couple (such as the testator’s sister and brother-in-law) are named, it is suggested that the will provide they must be together at the testator’s death and, if they are not, who should take custody (to avoid a situation where a couple who was married at the time the will was completed have divorced at the testator’s death). 

While naming a guardian is a good option, it is important for the testator to understand the limitations of such an appointment.  First, an appointment of a guardian will only be effective if, at the time the appointment takes effect, the individual who made it was the only one entitled to custody of the minor – so, if two parents are entitled to custody of a minor and one passes away, the surviving parent will be entitled to custody, not the guardian named in the deceased parent’s will. 

Second, an appointment made by will is only temporary in nature and will be effective for ninety days after the testator’s death.  Before the 90 days expired, the intended guardian must bring a court application seeking to be permanently appointed.  Ultimately, then, it will be up to the court to determine who will be awarded final custody of any minor children – and the court’s concern will be over what is in the best interests of the children, not what the will says.  In situations where appointing the guardian named in a will seems in keeping with the children’s best interests, the court will certainly give importance to the terms of the will – however, again, it is important for anyone making a will to understand that the will won’t necessarily be determinative.    

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. 

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Have a great day!

Megan F. Connolly