Tuesday, 7 March 2017

Dependency Claims and Estate Planning



One of our estate litigators in Calgary, Fred Fenwick, Q.C., recently recovered a judgment in excess of $500,000.00 in favour of a medically disabled, adult biological child as against the estate of her estranged biological father. 

The case was unusual as the biological relationship had never been acknowledged (although it was suspected) and although medically disabled as an adult, the claimant had no support relationship with the deceased during his lifetime.  Notwithstanding all that, the provisions of the Dependent’s Relief Act (now continued into the Wills and Succession Act) require an estate to support “family members” which includes not only the usual and expected family members (spouses, adult inter-dependent partners, minor children) but also “a child of the deceased who is at least 18 years of age at the time of the deceased’s death and unable to earn a livelihood by reason of mental or physical disability”. 

Notwithstanding the lack of any support connections during the deceased’s lifetime, the Claimant was medically disabled at his death and was eventually proven by DNA evidence to be “a child” and therefore under the statutory definition qualified for support.

The case was factually difficult and required the development of DNA evidence from the living disabled adult child (not difficult these days) but as well from the deceased who had passed away in 2009 (found in a hairbrush!).  The case also required the development of complicated medical evidence including expert opinion as to the lifespan of a medically disabled person which became an element of contest at the hearing.  You can imagine how unpleasant it was at the hearing  for the disabled person to hear strangers debating just how short their life was doomed to be.

How you felt about the success of the case at the end of the day would of course depend on what side you stood.  On the one hand, a genuinely medically disabled person was able to be lifted out of poverty and provided a modest level of comfort and support.  In addition, she was taken off the welfare rolls and all of our taxes went down by a miniscule amount.  On the other hand, this claim “came out of the blue” for the deceased and his other children and the final distribution of the estate and payment to the residual beneficiaries of the estate was delayed and of course reduced by the amount of the award and legal costs.

From an estate planning point of view, the case points out the necessity of a close, candid, and confidential relationship with your lawyer and other advisors when planning your estate and drafting your Will.  As in this case, you may not have disclosed to your family or your lawyer the identity and the nature of your dependants, or the extent of their dependency.  In other situations, it may not be immediately apparent that the property you think is yours may be   jointly held, or perhaps held by a corporation.  Accumulating debts such as deferred taxes or child and spousal support have the potential to eat into an estate before intended payments to beneficiaries are available.  There are many, many examples which point out how planning and administering an estate also law involves corporate, tax, family and litigation law.

The Wills and Estates Department at McLennan Ross LLP practices with lawyers and  staff with specific experience in estate planning, Wills drafting and probate but also practices with leading counsel in family law, corporate law, taxation, litigation and the other areas that you may not have been considering, but often do influence both the planning of your estate and the practical administration of it years later.

Thursday, 9 February 2017

What Other Documents Should You Consider When Getting a Will?

Author: Colin Flynn

The two most common documents that are drafted along with a Will are firstly, a Personal Directive, and secondly, Enduring Power of Attorney.  Having all three of the above mentioned documents should be part of any complete approach to planning for an individual’s final years.  Having all three can help a great deal in avoiding issues such as family infighting regarding what each family member believes your wishes to be.

The Enduring Power of Attorney
An Enduring Power of Attorney (EPA) is a document that you sign while you still have capacity, which enables someone else to look after your finances when you cannot (ie. when you lose capacity).  If you do not have an EPA it will be necessary for someone to apply to the courts for an order of Trusteeship should you become incapacitated.

The Personal Directive
Should you become incapacitated, the Personal Directive gives your appointed agent the authority to determine where you live and the kind of medical treatment you receive, as well as other personal decisions not dealing with your assets.

The Personal Directive should also contain what is morbidly referred to as a “Pull the Plug” clause, which provides for the type of treatment you are to receive in order to prolong your life. You should specify whether or not you wish for your life to be prolonged by artificial means when in a coma or a persistent vegetative state.  Further, it should be noted whether or not you wish to be given pain medication even though it may dull consciousness and indirectly shorten your life.

Although a Personal Directive generally contains language that your Agent must make any decisions based upon their knowledge of your wishes, beliefs and values, as much information as possible ought to be included in the Personal Directive to avoid any uncertainty in the future.

Conclusion
Just as changing your beneficiaries requires drafting of a new Will, should  your wishes as written in a Personal Directive or Enduring Power of Attorney change, so too should these documents. As with a Will, "sooner rather than later" are words to live by (pun intended), as any number of circumstances could lead to a loss of capacity, and hence, loss of the ability to put your wishes in writing and potentially avoid issues such as those noted above. 

Monday, 23 January 2017

Legal Representatives Beware - You Can Be Personally Liable for Taxpayer's Tax Debts


Author: MaryAnne Loney

According to subsection 159(1) of the Income Tax Act (the “Act”), legal representatives jointly and severally, or solidarily liable for a taxpayer’s tax liability while they are the legal representative, to the extent that the legal representative is at that time in possession or control of property that belongs or belonged to the taxpayer or their estate.

The Canada Revenue Agency (the “CRA”) recently released Technical Interpretation 2006-0638171E5 (the “Interpretation”) considering a legal representative’s liability pursuant to subsection 159(1) of the Act.  In the Interpretation the CRA interpreted what is meant by “that time.”

The Interpretation is quite alarming as it appears to suggest legal representatives such as executors or trustees could be personally liable for a tax debt the legal representative did not know about as a result of exercising their proper responsibilities.

Fact Scenario:

The CRA considered the following scenario:
  • A trust whose sole individual beneficiary has an unpaid tax liability for 2014 holds marketable securities with a fair market value (“FMV”) of $125,000 on December 31, 2016. 
  • The Trustee is the legal representative for the beneficiary for the purposes of section 159 of the Act.
  • The beneficiary filed his 2014 tax return and was assessed $150,000 outstanding tax liability on April 30, 2015.
  • Due solely to market decline, on April 30, 2015 the portfolio had a FMV of $100,000.
  • On January 1, 2016 the  CRA issued the Trustee a demand notice for the beneficiary’s tax debt.
  • On January 7, 2016 the Trustee sold the portfolio and, again due solely to market decline, was only able to obtain $70,000.

 

CRA Interpretation:

The CRA concluded that the wording of section 159(1) was such that “that time” is the time an amount becomes payable, being April 30, 2015 – despite the fact that at this point no demand for payment had been made to the Trustee and there is no indication that the Trustee had any way of knowing of the beneficiary’s tax liability. 

The Trustee could therefore be personally liable for the $30,000 loss in value between April 30, 2015 and the sale in January 2016.

 

Problems with interpretation for legal representatives:

The Interpretation is alarming for a couple of reasons. 

First, a legal representative may not learn of that tax liability until after it is payable.  This could occur when the legal representatives responsibilities do not include being responsible for the tax compliance of the person they represent, or, even when they are responsible for tax compliance, in the case of a late filed return or a later reassessment.

Second, the Interpretation appears to suggest that a legal representative could be personally liable for reductions in the value of the assets as a result of properly carrying out their fiduciary obligations as legal representatives – this could include not just as a result of market changes from investing as in the Interpretation but even potentially as a result of paying other creditors. 

 

Advice going forward:

Unfortunately, there do not appear to be any perfect answers – it is far too easy to imagine circumstances where there is tax liability a legal representative has no way of knowing about and the legal representative cannot liquidate all the assets and turn them into cash and/or must pay other creditors or risk breaching their fiduciary duties.

That being said, the Interpretation highlights that tax compliance should be of primary concern to a legal representative.  Tax returns should be filed prior to when tax payments are due when possible and as soon after when not possible.  Tax liabilities should be paid promptly and on a timely basis.  It also may make sense for an executor to obtain a clearance certificate for the deceased even if they are not yet ready to obtain one for the estate to reduce the risk that there is outstanding tax liability the executor is unaware of. 

It is also worth noting that this will likely only be a problem when the trust or estate does not have sufficient assets to cover the tax liability as, in all likelihood, a legal representative could be compensated from the trust or estate, provided the trust or estate had sufficient assets.

Finally, on a positive note, the CRA does not appear to date to be aggressively using subsection 159(1) to assess legal representatives for other's tax liability. Given the important role legal representatives play in our society, hopefully this won't change.

Thursday, 5 January 2017

Why You Need a Will

Author: Adam Vivian
 
There are many reasons for you to make a will.  Do you have children? Do you own a house, car, valuable personal items, or shares in a business?  Do you have a Registered Retirement Savings Plan, Pension or Insurance Plan?  If the answer to any of these questions is yes, then the reason you need a will is to determine who will gain the benefit or value of your estate’s assets (“Estate”) on your death.
 
Generally speaking, you are able to divide your Estate however you choose.  The notable exception to this rule is that your will must ensure that your spouse and any dependant children are provided for.  Outside of this requirement, you are free to name beneficiaries and determine what specific assets or shares of the Estate those beneficiaries are entitled to receive. 
 
Despite the fact that you can choose how to divide your Estate, if you die without a will (“intestate”), the distribution of your Estate is taken out of your hands and determined according to legislation.  In essence, without a will, you have no guarantee that the division of your Estate will conform to your wishes.
 
In the Northwest Territories, the Intestate Succession Act (the “ISA”) determines the division of intestate property.  The ISA states that if you die without a will and you leave a spouse but no children, the entirety of your Estate will go to your spouse.  However, if you die without a will and you leave a spouse and a child (or children) living, the distribution is more complicated. 
 
If your Estate is less than $50,000.00, your spouse will take the entirety of it – even where you have also had children survive you.  If your estate is over $50,000.00, your spouse is entitled to receive $50,000.00 and either one half of what remains after the $50,000.00 payment (if you have one child) or one third of what remains (if you have more than one child) – in this situation your children (regardless of number) will split the remaining two thirds equally between them.

The obvious problem with the distribution scheme as prescribed in the ISA is that it may not reflect your wishes. You may wish to leave the entirety of your Estate to your children, either equal in shares or in non-equal shares, conversely you may wish to give everything to charity, or to a close friend. The reason you need a will is for certainty, to make sure that your Estate is divided according to your wishes.

*Note: While this article specifically references the Northwest Territories, we offer estate planning for individuals in both the North and in Alberta.

Thursday, 8 December 2016

Supporting Gifts and Property Transfers Down the Road

Author: Joel Franz
 
Parents who transfer land or personal property to their children often do so with little or nothing in writing to document the transfer. Many would wonder why anything beyond the requisite conveyancing documents or simple transfer of possession would be necessary. Due to the historical nature of gifts, and how they are treated by the Courts, they can often be challenged by other parties, such as disenfranchised (or less enfranchised) siblings and family members. For the purposes of this blog, the parent is the party giving the gift, and the child is the one receiving the gift. However, the comments below apply equally to other parties, whether they are relatives, friends, or complete strangers.
 
Very simply, the law presumes “bargains” and not gifts. Where there is a gift, the onus is on the child to prove that the gift was (1) delivered, (2) accepted, and (3) the parent intended the gift. There is usually no issue with requirements one and two, and the dispute usually resolves around intention. This is usually complicated by the fact that when the gift is disputed, the parent has either passed away, or is incapacitated. Therefore, people need to look elsewhere for evidence of the parent’s intention.
 
Those challenging a gifts generally do so on the basis that the parent didn’t intend to actually effect a gift. The law is often on their side, as the person who received the gift usually bears the burden of proving intention. Those who have received gifts are often put in the difficult and uncomfortable position of proving that it was intentional. Further, they can be accused by others of unduly influencing the parent.
 
There are several ways to document the intention of the parties at the time the gift is transferred. For larger gifts, particularly transfers of land, the parent should always receive independent legal advice. Further, the parties can put their understanding in writing, which is always more valuable than word of mouth. Independent legal advice can be used to rebut a contention of undue influence, and is often the only practical way of doing so, particularly if the parent has passed away. For smaller gifts, getting the intention in writing is one practical solution. Getting mom or dad to write their intention of passing on an heirloom piece of jewellery, or a collectible car, is particularly useful should a family challenge the gift years later. Whatever you do, insuring the transfer is documented further than simply words spoken is key in assuring that the gift will stand years later, if challenged.

Friday, 18 November 2016

Blended Family Blunders: Considerations for Your Will

Author: Karen Platten, Q.C.

If you are in a second marriage or second relationship, your estate planning documents should reflect that.  For example, if you have children from a first relationship but would also like to provide something in your Will for your spouse, this can be done in a number of ways.  You will want to consider which assets should go to whom and whether they should be held in a trust or given to the spouse or children outright.

There are matrimonial property issues which impact your Will when you are in a second marriage or relationship and issues of to whom you are required by law to provide support.  Sometimes there is a conflict between providing for your spouse and your children and you will need to plan around that issue.

Each second marriage/relationship is different depending on the dynamics and make up of your family.  If you have been in this marriage/relationship a long time and there are no real conflicts within the family, you may consider doing mutual Wills where all of your assets go to the spouse at the death of the first spouse and then on to the children when the second spouse dies.  This requires the spouses to sign a contract which binds them and their estates.  Generally the children of both spouses are included in the distribution and the blended family is treated as one family.

If this would not work for your situation, there are many other ways of dealing with your estate.  Trusts are a fabulous vehicle, as are insurance policies, if the circumstances are right.  Holding funds in trust for a spouse to use and then having what remains at the end of the spouse’s life go to your children is very common in second marriages/relationships.

Maintaining an insurance policy so that your children receive something on your death while your other funds go to your spouse is also a solution if the circumstances are right and the policy does not become too expensive to maintain.

In short, there are many, many methods for dealing with second marriages/relationships in estate planning. You are only limited by your or your lawyer's imagination. However, if you do not want your family to feel like they have been through the blender, it is important to plan your estate so that it answers the needs of your situation.