EXTRA-TESTAMENTARY CONSIDERATIONS

Transcription

1 EXTRA-TESTAMENTARY CONSIDERATIONS HE. T.II The Continuing Legal Education Society of Nova Scotia Conference on will Preparation - March 24, 1990 Timothy C. Matthews Stewart MacKeen & Covert

2 - 2 - INDEX I. INTRODUCTION...- p. 3 PROBLEM EXAMPLE I p. 7 II. JOINT OWNERSHIP p. 8 (a) Survivorship, resulting trusts and advancement...- p. 8 (b) Creditors' claims... - p. 12 III. LIFE INSURANCE (a) Designation of beneficiaries... - p. 16 (b) Creditors' claims... - p. 17 IV. RRSP's AND OTHER BENEFITS (a) Designation of beneficiaries;... - p. 18 (b) Creditors' claims...- p. 19 PROBLEM EXAMPLE I I - p. 21 PROBLEM EXAMPLE I I I - p. 22 PROBLEM EXAMPLE IV... - p. 23 APPENDICES A. Levy v. Levy Estate (excerpts)... - p. 25 B. Insurance Act (excerpts) p. 38 C. Beneficiaries Designation Act (excerpts)... - p. 36 D. "Designating Beneficiaries" - Barry S. Corbin... - p. 48

3 - 3 - I. INTRODUCTION "Estate in probate" We are familiar with the concept of excluding certain assets from the inventory of the estate for probate purposes. Thomas Feeney, The Canadian Law of Wills, 2nd Edition, Volume I - Probate, writes: There is no need to mention lands held in joint tenancy or joint bank accounts or other joint property passing to a survivor under the rule of survivorship, for such property, as werl as the proceeds of life insilrance policies payable to named beneficiaries, does not form part of the estate valuation for the purpose of assessing probate fees To these categories can be added real estate in an intestacy (which passes directly to the heirs-at-iaw and not into the hands of the administrator) and foreign assets. "Estate for tax purposes" By contrast, for tax purposes, all assets in which the deceased held an interest prior to death must be considered. Under the Income Tax Act, there is a deemed realization of all capital assets at fair market value by reason of the death of the owner, and, unless there is a tax-free transfer to a spouse (deferral) or there is an exemption for the asset (for example,

4 - 4 - the principal residence, or the shares of a small business corporation or farm corporation) or there is an exemption for the testator (capital gains exemption), a capital gains tax liability may arise, whether the successor takes title by inheritance as an heir-at-law in intestacy, as a benefi.ciary under a will, as the survivor of two or more joint tenants, or as the named (designated) beneficiary. The tax liability will be payable by the estate, that is, by the administrator or executor, as the case may be, out of the estate in probate, namely, the assets which pass into the hands of the personal representatives, and not out of those assets passing directly to some other person. "Estate for purposes of family claims" It would appear that a claim pursuant to the Testator's Family Maintenance Act can only attach to the estate in probate and not to other assets formerly owned by the deceased which do not pass to the executor. Kerslake v. Gray, [1957] S.C.R. 516, 8 D.L.R. (2d) 705. Contrast this with the situation under the Succession Law Reform Act, R.S.O. 1980, c. 488, which takes into account jointly held assets and benefits paid to a designated beneficiary: see Re Moores and Hughes, (1981), 136 D.L.R. (3d) 516, 37 O.R. (2d) 785 (High Court), and Comment by Wolfe D. Goodman, (1983), 6 E.T.Q. 225 at

5 - 5 - I think the same narrow interpretation of "estate" would be applicable to a claim pursuant to the Matrimonial Property Act, but the court might well take these extra-testamentary assets notionally into account if they were matrimonial assets, so as to order an unequal division of the estate in probate. For a decision on a pension with a named beneficiary other than the spouse, see Jennings & Irving Pulp & Paper Ltd v. Jennings, (1986), 177 N.B.R. (2d) 181 (Queen's Bench). "Estate for purposes of creditors" A creditor would look first to the executor or administrator and the assets in the hands of the personal representative for payment of the debts of the deceased. What if these assets were insufficient, such that the estate in probate was insolvent? Depending on the nature of the extra-testamentary assets, the creditors may have resort to these assets in the hands of the direct beneficiaries of them. There are some complexities in this area, which I shall explore more fully subsequently in this paper. One curious anomaly is that, if an extra-testamentary asset is encumbered by a secured debt, the executor may be required to payout the debt from the estate in probate, while the recipient of the encumbered asset would take free and clear, unless the will otherwise provides. Re Simpson, [1927] 2 D.L.R.

6 , 60 O.L.R. 310 (High Court). If the beneficiary of the encumbered asset and the residuary beneficiary under the will are two different people, the result may not be what the testator intended. Ralph E. Scane in the paper entitled "Specific Gifts: Some Problem Areas" in (1984), 6 E.T.R. 217, at , raises the interesting dilemma in the case where "mortgage insurance" names the estate as beneficiary. If the encumbered real estate passes directly, say by joint tenancy, and the will contains a direction that the executor pay all debts, there would be no problem, as he would have the insurance proceeds to do so, and the mortgage debt would be a liability of the estate: Bramwell's Estate v. Caldwell, (1986), 65 N.S.R. (2d) 293 (Appeal Division). The law is otherwise in Ontario: Succession Law Reform Act, R.S.O. 1980, c. 488, s. 32(2), unless a contrary intention is expressed in the will. There, the general rule is that the devisee or heir or successor to real estate takes the property subject to the mortgage, i.e., must assume it or pay it out from his own resources.) Consider, however, if the will expressly excludes mortgages from the ambit of the payment of debts clause. In that case, if the mortgage insurance is payable to the estate, the executor would not be permitted to payout the mortgage.

7 - 7 - Fortunately, in most cases where mortgage insurance is in place, the proceeds are assigned to the lender and payable directly to retire the mortgage, so that the question does not arise. PROBLEM EXAMPLE I X and Y own Blackacre as joint tenants. X dies. In his will X states: "I give all of my estate to W" and I direct my executor to pay all my debts and taxes." Wand Yare X's children and he thought that, since Blackacre and the balance of his estate were equal in value, his two children would be treated equally. (a) Assume Blackacre has a gross value of $250,000 and a mortgage of $100,000, while the rest of the estate is valued at $150,000. If Y was obliged to assume the mortgage (or pay it out), then Y and W would be equally treated. However, the executor will be obligated (unless Y agrees otherwise) to pay the mortgage out of the estate in probate. The result is that Y receives free and clear Blackacre worth $250,000 and Wreceives only $50,000 (less any other estate expenses, of course). (b) Assume Blackacre has no mortgage, but is capital

8 - 8 - property, not exempt, and that X has exhausted his capital gains exemption. Assume that the V-day value of Blackacre is $100,000 and the market value at death is $250,000. Assume that the rest of the estate is valued at $150,000. There is a capital gain due to the deemed disposition of Blackacre on X's death. If Blackacre was purchased entirely with X's funds (i.e. Y had no real beneficial interest prior to X's death), the total gain may be $150,000 three-quarters of which may be taxable if he died in 1990 or subsequently. Who pays the tax? The executor out of W's residue! II. JOINT OWNERSHIP (a) Survivorship, resulting trust and advancement Thomas Feeney, in The Canadian Law of Wills, Volume II - Construction, writes at p. 99: When property is given to two or more persons concurrently the question arises whether these persons are to take as joint tenants, with the attendant rule of survivorship, or as tenants in common. The common Jaw rule for both real and personal property was that the donees took as joint tenants. This rule, subject to any legislation to the contrary, is Canadian law. However, the rule Wd:; always applied with reluctance, and th slightest indication from the context to negative the idea of joint tenancy

9 - 9 - was sufficient to result in a finding or tenancy in common. This common-law rule has been reversed in respect of real estate, by the Real Property Act, R.S.N.S. 1989, c. 385, s. 5(1): Tenancy in common and joint tenancy 5 (1) Every estate granted or devised to t wo or more persons in their own right shall be a tenancy in common, unless expressly declared to be in joint tenancy but every estate vested in trustees or executors as such shall be held by chern in joint tenancy. The foregoing rules deal with the legal interests, but they are not conclusive as to the beneficial interests, because of the doctrine of resulting trusts. Donovan Waters, Law of Trusts in Canada, 2nd Edition, contains a full exposition of the law of joint tenancy, resulting trusts, and the presumption of advancement. He writes, at p. 304: The principle has been established since the early eighteenth century that if one man buys property, but has it conveyed into another's name, or into the joint names of himself and another, that other becomes a resulting trustee for the purchaser of all the interest taken by that other. The best-known statement of the principle, cited and quoted in many Canadian cases, is that of Chief Baron Eyre in Dyer v. Dyer: The clear rl'sul t of all the cases, without a single exception, is that the trust of a legal estate, whether freehold, copyhold, or leasehold; whether taken in the names of the purchasers and others jointly, or in

10 the names or others without that of the purchaser i h'hether in one name or several; whether jointly or successive, resul ts to '_he man who advances the purchase-mane y. Dyer v. Dyer concerned land, but the principle is clearly applicable' to all forms of property, and there has never he en any quf>stion of its general application. [ ( 1788), 2 Cox 92, 30 E. R. 42 at Waters continues, at p. 308: Where a person transfers his property into another's name, or into the names of himself and another, and does so gratuitously, the principle underlying Dyer v. Dller would seem logically to apply to this situation also. Since Equity assumes bargains, and not gifts, he who has title gratuitously put into his name must prove that a gift was intended. In the case of purchase by one person taking title in the name of another, the resulting trust produces this effect, namely, of putting the onus of proof of a gift upon the transferee. It is not enough for the transferee to show that the transfer was "complete and perfecr:", in the sense that the transferee is fully vested with title to the property; he must al~;o show that a gift was intended. On occasion, however, the courts have shown themselves not entirely satisfied with this presumption of a resulting trust. They have not said in any case that they will ignore the presumption, and require the claimant to property, which he his had put into another 's name, to prove that ljt~ did not intend a gift, but they have been inclined to play down the presumption by sayinq lhat they will look at the evidence (with an open mind?) and, weighing everything, determine what it was in each case that the parties intended. As a consequence, it is only in the relatively rare case where all the evidence is completely ambiguous, that the

11 presumption of a resulting trust has real 5i gnif icance. The presumption of a resulting trust is rebuttable. As we saw earlier, any evidence, written or parol, may be adduced to rebut the resulting trust, including circumstantial evidence. The later might take the form that the transferee on a purchase had at the time such slender means that he could not have supplied the purchase money. But what standard of proof is required to rebut the resulting trust? Quoting Lewin on Trusts... the evidence must prove the fact of gift "very clearly If. However, the very weakness of the case put forward by A, the person who claims the benefit or a resulting trust, may resul t in the rebutt.ing of the trust. The contrary presumption, that of advancement, applied at common law, however. Waters writes, at p. 313: If A is able to establish that he purchased property and had it conveyed into B's name, or that he voluntarily transferred property to B f there is commonly said then to be a presumption of a resulting trust in A's favour. But the presumption, which puts the burden or proof on B to prove A intended.j gift, will not arise where B is a child or wife ot A. In such cases there is a presumption that: A intended to make a gift, and it is for A to prove that he had no such intention. The word "advancement" is now rather archaic, but it meam; that the person who stands in the position of a husband or father is assumed to be making over a portion of his assets to one who by marriage or parent-child relationship is in some degree financially dependent upon him alld might reasonably expect to share in the assets of the transferor on his death. In that sense the transfer of property is an "advance 1/ of wllat might be expected on the transferor's death. As far as children are concerned, an "advancement /I also implies a

12 donation to assist the child in establishing himself in life. The presumption of advancement, as between spouses, has been abolished in Nova Scotia by the Matrimonial Property Act, R.S.N.S. 1989, c. 215, s. 21(1), and replaced by the doctrine of resulting trust. The presumption of advancement still exists, however, between parent and child. The presumption of advancement is rebuttable as well, in appropriate fact situations. For an intriguing example of judicial interpretation of the law in this area, reference is made to the leading case of Levy v. Levy Estate, (1981), 50 N.S.R. (2d) 14 (Supreme Court, Trial Division), which is excerpted in Appendix A. A surviving joint tenant who has killed his former cotenant is deemed to be a trustee for her estate of her beneficial interest: Merkley et a1 v. Proctor, (1989), 33 E.T.R. 175 (Manitoba Queen's Bench). For further reading on advancement, see Dennis R. Klinck, "The Unsung Demise of the Presumption of Spousal Advancement", (1986), 7 E.T.Q. 6.

13 (b) Creditors' claims The law concerning execution on jointly owned assets is not without difficulty and controversy. It is clear that if the co-tenant who is the judgment debtor dies before execution is levied by the sheriff, the surviving joint tenant takes the entirety free and clear of the debt, by reason of survivorship, the debtor's interest having ceased on death. While both joint tenants live, can the sheriff execute against their joint bank account for the debts of one of them? In Empire Fertilizers Ltd. v. Cioci, [1934] 4 D.L.R. 804, the Ontario Court of Appeal said "yes", but in Hirschorn v. Evans, [1938] 2 K.B. 801, the English Court of Appeal said "no". If the money in the account belongs beneficially to the non-debtor co-owner, then execution can be resisted or the claim of a trustee-in-bankruptcy of the debtor co-tenant: Re Adler, [1951] O.W.N. 681 (High Court); Harrods, Ltd. v. Tester, [1937] 2 All E.R. 236 (Court of Appeal). If it is ambiguous as to whether or to what extent each joint owner is beneficially entitled, and only one is a debtor, it may not be possible to execute: Re Davis, Nash and Davis v. Royal Bank of Canada, (1958), 13 D.L.r. (2d) 411 (British Columbia Supreme Court). A debt owing to a partnership may not

14 be garnisheed by a creditor of one of the partners in his personal capacity, Hoon v. Maloff et al; Jarvis Construction Co. Ltd., garnishee, (1964), 42 D.L.R. (2d) 770 (British Columbia Supreme Court). It has been persuasively argued that the courts should be wiling to review the beneficial ownership evidence, in the same way as when a claim of resulting trust is asserted by one of the joint owners (or his estate) against the other: Mark R. MacGuigan, (1957), 71 Harv. L. Rev In the case of real estate, C.R.B. Dunlop summarizes the law in Debtor-Creditor Law in Canada in the following way, at pp : The Canadi an court~; ha ve not hes i tated to hold that a creditor of a joint tenant can execute against his interest in the land, whether or not the other joint tenallt is indebted to the execution creditor. The early cases had more difficulty with the situation of property held in joint tenancy subject to a mortgage, but the more recent decisions have found such an interest to be eligible as well. Another problem in executing a joint tenant's interest is to decide at what point in time the execution creditor causes the joint tenancy to be severed, i.e. to be changed into a tenancy in common. The point is important because of the doctrine of survivorship under which a joint tenant's interest in the land passes on his death to the other jclint tenant free and clear of all executions and charges which have not had the effect ot severing the joint tenancy. Following early English law, the Canadian courts have held that where execution has taken place the joint tenancy is severed, but the problem

15 has been to decide wilae execution means for this purpose. Although there was some conflict in earlier cases, the law today is clear that the mere deli very of a writ to the sheriff or the registration of a judgment or writ in the land registry office does not have the effect of severing the joint tenancy I nor does it create a charge on the debtor joint tenant's interest which is capable or surviving his death and attaching to the property in the hands of the surviving joint tenant. Something more is needed, although exactly what is unclear. In the leading Ontario decision in Power v. Grace the learned trial judge identified the test as follows: lithe trend (If the authorities is that a mere lien or charge on the land, either by a co-tenant or by operation of law, is not sufficient to sever the joint tenancy; there must be something that amounts to an alienation of title." (1932] 1 D.L.R. 801 at 802 (Ontario County Court). On appeal Grant J.A. spoke of execution as meaning "seizure, selling or disposing" and later observed that land cannot be said to be in execution liuntil execution against the lands is actually commenced by advertisement or probably by an actual seizure upon the lands themselves" (1932) 2 D.L.R. 793 (Ontario Court of Appeal), at 798. The difference between these dicta is that one appears to require that execution be completed by an alienation of the land, while the other is satisfied with the commencement of the sale progress by advertisement or some other step. It is not settled which of these positions is correct, although it has been recently argued that severance should not occur until the land is so.ld because, up to that date, the debtor can arrest the execution process. [McClean, "Severance of Joint Tenancies", (1979), 57 Can. Bar. Rev. 1] In this Province, one must take into account the Sale of Land under Execution Act, R.S.N.S. 1989, c Notwithstanding the foregoing, I personally would be

16 uncomfortable with the proposition that a registered judgment had no effect on the interest of the surviving joint tenant in lands formerly held jointly, where the debtor tenant had died after the recording of the judgment. I would be interested in being referred to a Nova Scotia case ruli~q on whether such a judgment would be a proper title requisition or not. III. LIFE INSURANCE (a) Designation of Beneficiaries Reference is made to the appropriate provisions of the Insurance Act, H.S.N.S. 1989, c. 231, excerpts from which appear in Appendix B. Clearly, the best way to name a beneficiary of a policy is by a designation on the life insurance company's printed form, which is attached as a declaration to the policy itself, on delivery to the company or its agent. To rely on a designation in a will is second-best, in my view, as wills can be revoked. Even though a will speaks from the date of death, it appears that a designation of beneficiary made after the date of execution of the will (and before death, obviously) will prevail. The insurance company will not know the

17 terms of the will until the insured has died. If the proceeds are paid out to the beneficiary named in the policy, before the will designation is brought to the company's attention, the result could be most unfortunate. There is also a danger in using a vague clause in a will to change a beneficiary designation - it may not be acceptable to the company and may fail to achieve the testator's intent. At the very least, it may result in litigation: See: e.g. Re Church, (1977) 2 E.T.R. 222 (Ontario High court). For a discussion, see Barry S. Corbin. "Designating Beneficiaries". (1989). 9 E.T.Q. 199, reproduced as Appendix D. It is interesting to see the result if the named beneficiary predeceases the insured, see, e.g. Re Melnyk, (1978), 3 E.T.R. 227 (Alberta Supreme Court, Trial Division). (b) Creditors' claims Insurance proceeds paid directly to a designated beneficiary are exempt from seizure by creditors: Insurance Act, s. 198(1). In fact, if certain family members are designated, the policy values cannot be executed upon by creditors, even though it is within the power of the debtor to "cash it in". Insurance Act, s. 198(2). c027l260

18 The result could be different if it could be shown that the designation amounted to a settlement or a fraudulent conveyance: Re Geraci; Swallow v. Geraci, (1970), 14 C.B.R. (N.S.) 253 (Ontario Court of Appeal), overruling (1969), 13 C.B.R. (N.S.) 86. See: C.R.B. Dunlop, "Life Insurance Exemptions" in Debtor-Creditor Law in Canada, for a history of these provisions. Sometimes it is surprising what assets can qualify as life insurance - for example, an annuity issued by a life insurance company: Bank of Montreal v. Arrowsmith, (1984), 7 C.C.L.I. 256 (Nova Scotia Supreme Court, Trial Division). See, generally: "Enforcement against Life Insurance, Pensions and RRSP's" in M.A. Springman and Eric Gertner, Debtor Creditor Law: Practice and Doctrine. IV. RRSP' s AND OTHER BENEFITS (a) Designating Beneficiaries Reference is made to the appropriate provisions of the Beneficiaries Designation Act, R.S.N.S. 1989, c. 36, which

19 appears as Appendix c. Again, clearly the best way to name a beneficiary is by a designation on the printed form of the institution issuing the plan, so that it conforms with the requirements of the issuer and the issuer clearly has notice. Corbin (Appendix D, page 219) suggests that our Act contains a drafting deficiency, so that it is uncertain whether a designation can be made by will. More important, he points out that the designation must be made "in accordance with the terms of the plan" (s. 3). What happens if the contract does not permit designation in a will? Presumably the Act does not avail. Even if the plan allows beneficiary designation by will, great caution must be taken to be specific, if the client wishes to proceed in this manner. (b) Creditors' claims An RRSP or other financial benefit which qualifies as life insurance will be protected by the exemptions contained in the Insurance Act, as noted. Otherwise, the question whether a creditor may have access to proceeds, either during the debtor's lifetime or after his death, may be in doubt.

20 In Bliss, Kirsh v. Doyle et al; Montreal Trust Company (garnishee), (1983), 16 E.T.R. 290 (Ontario High Court), the debtor was alive, and the trust company declined to comply with the garnishee order. Krever, J. held th~t the relationship of the trust company and the debtor was one of trustee and beneficiary, not debtor and creditor, so that garnishee was not available. The debtor could not be compelled to collapse the RRSP plan. However, a commentary on the case by R. Warren Law points out that the proceeds could still be seized by creditors through equitable execution. The Nova Scotia execution order combines garnishee and a number of other remedies, so this case may not be greatly relevant to our practice. In Canadian Imperial Bank of Commerce v. Besharah, (1989), 680.R. (2d) 443 (High Court), the court permitted the plaintiff bank to trance the proceeds of a registered retirement savings plan which had been paid out by the trust company custodian to the designated beneficiary, the wife of the deceased debtor. The judge noted the rule that the personal property of a deceased person is deemed by law to vest in the hands of the personal representative, who holds the assets in trust for persons beneficially entitled to them after payment of the deceased's debts. He noted that the RRSP was owned solely by the

21 deceased and his wife has no vested interest in it prior to her husband's death. The husband had total control over the asset and the wife had only a contingent interest. See, generally: D. Shawn McReynolds, "Sheltering RRSP Assets from Creditors on Death", in (1983), 6 E.T.Q PROBLEM EXAMPLE II X and Yare husband and wife and own Blackacre jointly. It is not a matrimonial home and was purchased entirely with X's funds. X dies. (a) In his will, X bequeaths $150,000 and the matrimonial home to Y, and devises and bequeaths all the rest and residue to his son W. Does the will affect the disposition of Blackacre? (b) In his will, X stipulates that any beneficiary must survive him for thirty (30) days to inherit his or her gift. Assume that Y dies within 30 days of X. Does the will affect the disposition of Blackacre?

22 Suppose now that X and Yare father and son. Repeat the same questions. PROBLEM EXAMPLE III X has a life insurance policy, naming Y as beneficiary. Next he makes a will, purporting to change the beneficiary to Z, his fiancee. (a) X dies. Who receives the proceeds of the life insurance? (b) X marries Z and then dies. Who is the beneficiary? (c) X does not marry Z, and does a new beneficiary designation in favour of W, and then dies. Who is the beneficiary? (d) X makes a new will, revoking the first will, but not making any specific reference to the insurance policy. Who receives the proceeds when X dies? (e) X dies, and the insurance company, unaware of his will, pays Y, the beneficiary named on their c027l260

23 records. Y disappears. Can Z sue the insurance company successfully? Can she sue the lawyer who drafted X's will? PROBLEM EXAMPLE IV x has an RRSP with ABC Insurance Co. At 71, he opts to change it into an RRIF. X had made a will after acquiring the RRSP, but before attaining age 71. In his will, X stated: "I hereby designate my daughter Y as beneficiary of my RRSP no issued by ABC Insurance Co. and this shall be deemed to be a designation within the meaning of the Beneficiaries Designation Act of Nova Scotia." (a) X dies. The RRIF, although held by ABC Insurance Co., has a different policy number. Is the beneficiary designation effective, or does it fail because there is no longer an RRSP or because the contract reference number is incorrect? (b) The RRIF contains a provision stating that no beneficiary designation shall be effective unless notice is given to the insurance company in writing by the policy holder. Does the contract prevail or does the Act (assuming that the designation in the will is not ineffective for other reasons)?

24 (cl The RRIF has a lump sum death benefit of $100,000. The estate in probate in insolvent. X dies. Can his creditors attach the proceeds, if there is no valid beneficiary designation? What if there is a valid beneficiary designation? What if the contract has a provision to the effect that, if no other designation is made, the surviving spouse shall be deemed to be the beneficiary? What if there is no spouse, and the contract states that the personal representatives are to receive the proceeds?