News,Articles & Resources from PPL Chartered Accountants and accounting services
Read the latest about tax, accounting and finances on Parker Prins Lebano Chartered Accountants' News & Articles pageWednesday, June 25, 2008
Family Redefined - A Tax Perspective
Christine Prins
Increasing divorce rates, common-law relationships, multiple-partner children and multiple successive marriages have created some interesting albeit challenging situations for the lawyer, accountants and other professionals assisting in the drafting of an effective will. For instance, based on the 2006 Canadian Census, families consisting of common-law couples grew most quickly of all family structures since 2001 (18.9% vs. 3.5% growth for married-couple families)[1]. Common-law families accounted for only 7.2% of all census families a decade ago, compared to 15.5% in 2006[1]. This trend relates to both younger couples as well as those over 64. While these issues can cause complications for the will drafter, the lack of family members can also pose some complexities. For instance, the proportion of childless census families and one-person households has also increased since 1986[1]. Clearly, the result of these societal trends is a shift in traditional, nuclear family-based estate planning needs.
These demographic changes have occurred for many reasons. For instance, the incidence of dual incomes has neutralized previously prevalent differences between spousal earnings. Several decades ago, the traditional couple consisted of an income-earning husband and a stay-at-home wife. Despite the existence of an acrimonious marriage situation, the wife would have found it very difficult to leave due to her dependence (and her children’s dependence) on the financial support of her husband, particularly in the short-term before spousal/child support might have been forthcoming. This income gap has closed dramatically over the years resulting in spouses being more capable and willing to separate due to their financial independence. Social stigmas have also been lessened as society becomes more tolerant of divorce, common-law relationships, same-sex committed relationships and single parents. Statistics Canada counted same-sex couples for the first time in its 2006 census[1] and in Quebec, common-law partners have become more prevalent than married persons; more than one-third of Quebec couples live in a common-law relationship[1]. Recent tax and family law changes have made it easier for unmarried couples to enter into a financial relationship without the commitment of marriage. Following family law adoption, the term “spouse” for tax purposes was afforded an expanded definition in some limited areas in 1988[2]. This was followed in 1993 by the full parity of common-law spouses and married spouses[2].
As a result of these societal movements, second marriages or common-law relationships have become very common. Difficulties in drafting a will in such situations include the choice of executor, treatment of marital homes and adequate provision for all family members. In the most common case, we advise an individual who has a certain amount of wealth who then decides to remarry another individual. Under normal circumstances, this is not overly complicated as the individual’s new spouse normally becomes the beneficiary of all post-divorce assets in response to the breaking of previous marital ties. When children are involved, the situation is much more complex. In this case, children of the first marriage would normally expect claim over any assets acquired in that first marriage including the original marital home if it has been retained. What happens to those assets during the individual’s lifetime and subsequent to the re-marriage can cause some major problems.
Choosing an executor can often be a complicated endeavour in the case of a second marriage. The individual’s will would cover assets accumulated both during the second marriage as well as those owned at the outset. Inconsistent expectations of the beneficiaries may cause discord among the surviving spouse, children of the first marriage and possible children of the second marriage who all wish to stake claim on the individual’s assets. The naming of an executor can often signal preference within the beneficiaries or interested parties and while the executor must follow the instructions in the will, there certainly can be some actions on the part of the executor that could be to the detriment of beneficiaries (i.e. the insistence of full holdback of estate funds pending tax clearance which is likely not necessary in most cases but within the rights of the executor and maximization of executor fees that might otherwise not have been taken). In this particular case, where beneficiaries have incongruous expectations of their claim to estate assets, a professional could be listed as the executor. In theory, this professional would be impartial to all beneficiaries and have only the incentive of carrying out both the terms and spirit of the will.
Claim to the marital home can be satisfied via the inclusion of a life interest clause in the will of the individual. This allows for the second surviving spouse to continue living in the home but ensures that the ultimate proceeds of the sale of the home (i.e. the residual interest) upon the second spouse’s demise, return to the original beneficiaries. To prevent the second spouse’s ability to reduce the value of the home via deterioration, the will could include some expectations of how the marital home is to be maintained for the purposes of the life interest. The intent of a life interest, however, can have some limitations under the law. In the case Yamada v. Zolad[3], the Ontario Court of Justice allowed an election under the Family Law Act whereby a separated spouse was allowed to take her share of family property instead of her life interest in her husband’s estate. In another case, Noik v. Noik (2004 ON C.A.)[4], the vague wording of the will required a judge to interpret whether the deceased intended to convey a life interest or a financial interest in the home. Therefore, financial intention should be clearly defined via an updated will at all times.
Care must be taken by the will drafter to ensure that all family members including children from the first and subsequent marriages and the current spouse are adequately considered. Current law cites a duty to provide for the adequate care and maintenance of children and spouse which allows legal avenues for a child who is effectively shut out of a parent’s will, to make a claim under Part V of the Ontario Succession Law Reform Act[5]. For instance in the case of Cummings v. Cummings (2004 Ontario C.A.)[6], two adult, albeit dependent children, claimed originally and on appeal that their testamentary trust did not adequately address their on-going needs when the father’s remaining assets transferred to his second spouse via joint ownership. In this case, the judge considered both the financial needs of the dependents as well as the moral and ethical duties of the testator towards his family. While the appeals judge agreed with the original judgement (which did acknowledge that the testamentary trust had been inadequate), reference was made to the Supreme Court of Canada Case, Tataryn v. Tataryn Estate (1994 S.C.C.)[7], where the courts granted estate assets to a son who was purposely omitted from a will.
The will drafting is even more complex in the case of multiple marriages with children from more than one spouse or partner. It could be suggested that the legal professional involved would need to have a higher level of speculation of will changes subsequent to a second marriage that are in favour of the second spouse or his/her beneficiaries. Certainly, these types of changes would be of much higher examination by beneficiaries who have been left out of wealth by reason of possible undue influence by the second spouse. The case of Hall v. McLaughlin Estate, 2006 (ON S.C.)[8] demonstrates this situation where a deceased’s estate passed fully to her second husband and then to her second husband’s children, omitting the children from her first marriage access to her assets. The testator’s intent and previous conversations with family members were taken into consideration and the court established a constructive trust for the testator’s daughters. While provision under the succession legislation exits, it can be reasonably assumed that a higher percentage of contested wills relate to more complex and non-traditional family arrangements.
An intestate situation would be disastrous in the case of multiple marriages with children involved as the courts will determine the estate trustee and distribute property under the applicable provincial laws (i.e. in Ontario, Part II of the Succession Law Reform Act R.S.O. 1990 c. S.26)[9]. While these rules are fairly specific in terms of priority based on relation, they may not result in an intended distribution of wealth. For instance, in the case Lee v. Leung, 2004 (ON S.C.)[10], a $55 million intestate situation involving a second wife and children from two marriages resulted in a multitude of administrative and financial problems. As a result, individuals entering into second marriages must ensure that they have a valid will that clearly outlines their wishes for all involved.
Another societal trend has been the movement towards smaller families and in particular, childless couples and single individuals. The social pressures to have children and the need for assistance on the family farm or business have been greatly reduced in recent decades, leaving many couples and singles with the freedom to pursue careers and personal interests instead of raising children. In many cases, because they have avoided the costs of having children and have not experienced any delays in their career paths, these childless couples have amassed wealth in terms of both investments and property. While excess wealth is considered a luxury to most, it can pose some interesting and difficult situations when drafting the will, particularly in the case of the death of the second surviving spouse or unmarried individual. These individuals often have more distant family members (i.e. nieces, etc.), however in many cases, do not have sufficiently close relationships to warrant a large bequest. (In the case, Montgomery Estate v. Miller, 2006 (ON S.C.), the courts agreed that a bequest extended to the stepchildren of the deceased’s nephew[11].) Because of the requirement of direct beneficiaries and/or joint ownership, probate planning is also particularly difficult in these cases.
The overall requirement of a will is paramount in the case of childless couples or individuals as succession legislation will likely result in very distant relatives receiving wealth. The Table of Consanguinity used under the Ontario Succession Law Reform Act[12], for example, extends as far as fifth cousins. Should there be no living relations, ownership of property transfers to the Crown and is then administered under The Escheats Act[12]. At this point, any pre-existing intent of the individual would most certainly be compromised.
Charitable causes are often a viable answer in the case of the childless second surviving spouse. In these cases, the tax benefit is twofold in that capital gains arising on the deemed disposition of assets can be completely offset by a corresponding donation credit. Also, based on amendments to the Income Tax Act S. 118.1(5), made in 1999, direct beneficial donation of an RRSP, RRIF or insurance policy will also result in a donation credit in the full amount of the policy on the terminal return[13]. Donating appreciated securities in kind to a charity can also be included in the drafting of the will and result in very favourable tax treatment. Changes to the Income Tax Act, Section 38.1 have eliminated capital gains on the donation of certain shares/bonds when made to charities in-kind subsequent to May 1, 2006[14]. The full donation credit would still apply, resulting in a very preferential tax result. In all of these cases, the will drafter must ensure that the charities are either listed as direct beneficiaries (in the case of a registered product or life insurance) or that the donation is dealt with directly in the will. A donation made by the estate based on the informal wishes of the deceased person will result in a less-valuable credit to the estate tax return or beneficiary making the donation.
When charities are involved, the drafter of the will in these cases should be careful to ensure that alternate charitable causes are indicated should the charity named be wound up before the will is executed. Also, the drafter should try to avoid the situation where the charity is a residual beneficiary of the will. This situation can cause lengthy tax clearance periods as the tax professional and CRA determine the end result of the circular calculation caused by the value of the residual which is dependent on the resultant tax bill which is resultant on the value of the donation credit, etc. This also usually results in the necessity to carry back excess donations to a prior year return once the residual is “determined” causing more circular calculations, occasionally resulting in the executor settling for a lower estimated donation credit, to the detriment of fair taxation follow-through.
Another challenging circumstance for the will drafter and professional team is the situation of a large family with many sibling beneficiaries of varying ages, abilities and personal needs. In the case of very young children, most issues can be dealt with via testamentary trusts with rights to income and capital interests based on age. If the individual and his/her spouse are young themselves, the use of term life insurance can be an inexpensive way to ensure that these trusts are adequately funded should sufficient wealth not yet have been accumulated. Clearly this requires planning and revisiting of the will and insurance policies to determine whether they are still reasonable in light of the individual’s wealth and children’s ages and personal situations. The choice and proper designation in the will of executor and guardian is imperative here since much trust and decision-making discretion will be placed in these individual(s) for potentially long periods of time. These two chosen individuals must work together to ensure that the deceased’s wishes are carried out both in terms of financial decisions and child-rearing. Because these wishes are most important to parents, it could be advisable to include non-tangible wishes as part of the will, within a codicil or in a written, albeit unenforceable attachment to the will. With the last option, although it is simply a statement of wishes, the ability to be very specific as to the use of funds, intentions of education, religion and other matters can be of huge comfort to parents who would not otherwise be able to voice this in a testamentary situation. Care should also be given to noting a secondary physical and financial guardianship since under the Ontario Children’s Law Reform Act S61(1) and (2)[15], control is given to the primary guardians to appoint their replacement upon their own demise.
In the case of larger families, often needs differ between beneficiaries. Parents with disabled children feel particularly vulnerable when considering their child’s future without them. A “Henson trust” is a common planning tool in these situations which provides for the financial care of the disabled child without compromising the Ontario Disability Support Program Act of 1997 (ODSPA). The ODSPA, among other things, limits the amount of income provided under the program when the disabled person’s income is over a particular (very low) threshold and where that person owns assets (with some exceptions) in excess of $5,000[16]. One of the exceptions is a trust less than $100,000 in value. Named after the case Ontario (Ministry of Community and Social Services) vs. Henson (1987)[16], the Henson model addresses this limitation through the argument that a truly discretionary trust results in the beneficiary having no true entitlement to income or capital. The trustee, therefore, holds the power and can distribute within the limits of the ODSPA regulations. Technical changes were made to the Income Tax Act in 2002[17] to even allow for the “refund of premium” rules to apply to a Henson trust in the case of a guardian’s RRIF/RRSP proceeds, preventing full deeming income inclusions upon the death of the guardian. As in the case with any trusts for the benefit of vulnerable individuals for the reason of age or ability, much care must be put into the selection of the trustee.
In all cases, testamentary issues can be rectified or lessened by the practice of pre-estate gifts whereby wealth is transferred to intended beneficiaries before the individual passes away. The benefits of this are many in that the individual pays less tax on the income and can transfer this income to a lower-bracket individual, the individual can experience the positive effects of the inheritance on their loved ones, the probate fees are eliminated on any wealth transferred before they pass away and worries of correct wording in the will or the chance of the spirit being misinterpreted are eliminated. Of course, this practice comes along with its own caveats as well. Inequitable living gifts can cause estate inequities that may be unintended if not dealt with in the will. As well, the liquidation of securities can cause tax implications to the individual at high brackets and potentially to the detriment of Old Age Security clawbacks and other income-based benefits. Certainly, the most disastrous result of this would be health beyond expected mortality resulting in an eventual need for the cash flow considered excess and gifted earlier on.
In all complex cases, avenues are available for the individual and their professional team to effectively carry out the various needs of the individual and their family. In some cases, this is easier to carry out while the individual is still living. In other cases, the will must be well-thought out to include life interests, trusts and other planning tools. On the other hand, beneficiaries and potential beneficiaries have the means via the courts to contest will documents which they feel have been interpreted incorrectly or unfairly drafted through will variation legislation. All types of family structures involve different issues and peculiarities to the estate planning process and within these structures, each family has their own set of unique needs and dynamics. Through proper estate planning with the individual, which includes the drafting of the will as well as an understanding of that person’s assets and intents and the use of other wealth transfer techniques, assets can be distributed in an effective manner.
Bibliography
1) Statistics Canada, 2006 Census; Family Portrait; Continuity and Change in Canadian Families and Households in 2006,
http://www12.statcan.ca/english/census06/analysis/famhouse/
cenfam1.cfm (accessed October 2007)
2) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 671-675
3) CanLII, Yamada v. Zolad, 2007 CanLII 4320 (ON S.C.) http://www.canlii.org/eliisa/highlight.do?text=life+interest&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2007/2007canlii4328/2007canlii4328.html (accessed October 2007)
4) CanLII, Noik v. Noik, 2004 CanLII 9816 (ON C.A.), http://www.canlii.org/eliisa/highlight.do?text=Noik+v.+Noik&language=en&searchTitle=Ontario&path=
/en/on/onca/doc/2004/2004canlii9816/2004canlii9816.html (accessed October 2007)
5) CanLII, Ontario Sucession Law Reform Act (R.S.O. 1990 C.S. 26), http://www.canlii.org/on/laws/sta/s-26/20070911/whole.html#BK65 (accessed October 2007)
6) CanLII, Cummings v. Cummings, 2004 CanLII 9339 (ON C.A.), http://www.canlii.org/eliisa/highlight.do?text=adult+dependent+children+estate&language=en&searchTitle=
Ontario&path=/en/on/onca/doc/2004/2004canlii9339/
2004canlii9339.html, (accessed October 2007)
7) CanLII, Tataryn v. Tataryn Estate, 1994 CanLII 51 (S.C.C.) http://www.canlii.org/en/ca/scc/doc/1994/1994canlii51/
1994canlii51.html, (accessed October 2007)
8) CanLII, Hall v. McLaughlin Estate, 2006 CanLII 23932 (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=second+marriage+estate&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2006/2006canlii23932/2006canlii23932.html (accessed October 2007)
9) Suzanne Hanson and Sandra Bussey, Death of A Taxpayer (Toronto, ON: CCH Canadian Limited, 2001), 2
10) CanLII, Lee v. Leung, 2004 CanLII 7797 (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=second+marriage+estate&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2004/2004canlii7797/2004canlii7797.html (accessed October 2007)
11) CanLII, Montgomery Estate v. Miller, 2006 CanLII 18522, (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=nephew+deceased&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2006/2006canlii18522/2006canlii18522.html (accessed October 2007)
12) Suzanne Hanson and Sandra Bussey, Death of A Taxpayer
(Toronto, ON: CCH Canadian Limited, 2001), 4
13) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 1202
14) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 740
15) CanLII, Children’s Law Reform Act, R.S.O. 1990, c. C.12, S. 61(1), (2), http://www.canlii.org/on/laws/sta/c-12/20070911/whole.html (accessed October 2007)
16) Robert Spenceley, The Estate Planner’s Handbook (2nd Edition) (Toronto, ON: CCH Canadian Limited, 2005), 240-241
17) Robert Spenceley, The Estate Planner’s Handbook (2nd Edition) (Toronto, ON: CCH Canadian Limited, 2005), 243-246
Increasing divorce rates, common-law relationships, multiple-partner children and multiple successive marriages have created some interesting albeit challenging situations for the lawyer, accountants and other professionals assisting in the drafting of an effective will. For instance, based on the 2006 Canadian Census, families consisting of common-law couples grew most quickly of all family structures since 2001 (18.9% vs. 3.5% growth for married-couple families)[1]. Common-law families accounted for only 7.2% of all census families a decade ago, compared to 15.5% in 2006[1]. This trend relates to both younger couples as well as those over 64. While these issues can cause complications for the will drafter, the lack of family members can also pose some complexities. For instance, the proportion of childless census families and one-person households has also increased since 1986[1]. Clearly, the result of these societal trends is a shift in traditional, nuclear family-based estate planning needs.
These demographic changes have occurred for many reasons. For instance, the incidence of dual incomes has neutralized previously prevalent differences between spousal earnings. Several decades ago, the traditional couple consisted of an income-earning husband and a stay-at-home wife. Despite the existence of an acrimonious marriage situation, the wife would have found it very difficult to leave due to her dependence (and her children’s dependence) on the financial support of her husband, particularly in the short-term before spousal/child support might have been forthcoming. This income gap has closed dramatically over the years resulting in spouses being more capable and willing to separate due to their financial independence. Social stigmas have also been lessened as society becomes more tolerant of divorce, common-law relationships, same-sex committed relationships and single parents. Statistics Canada counted same-sex couples for the first time in its 2006 census[1] and in Quebec, common-law partners have become more prevalent than married persons; more than one-third of Quebec couples live in a common-law relationship[1]. Recent tax and family law changes have made it easier for unmarried couples to enter into a financial relationship without the commitment of marriage. Following family law adoption, the term “spouse” for tax purposes was afforded an expanded definition in some limited areas in 1988[2]. This was followed in 1993 by the full parity of common-law spouses and married spouses[2].
As a result of these societal movements, second marriages or common-law relationships have become very common. Difficulties in drafting a will in such situations include the choice of executor, treatment of marital homes and adequate provision for all family members. In the most common case, we advise an individual who has a certain amount of wealth who then decides to remarry another individual. Under normal circumstances, this is not overly complicated as the individual’s new spouse normally becomes the beneficiary of all post-divorce assets in response to the breaking of previous marital ties. When children are involved, the situation is much more complex. In this case, children of the first marriage would normally expect claim over any assets acquired in that first marriage including the original marital home if it has been retained. What happens to those assets during the individual’s lifetime and subsequent to the re-marriage can cause some major problems.
Choosing an executor can often be a complicated endeavour in the case of a second marriage. The individual’s will would cover assets accumulated both during the second marriage as well as those owned at the outset. Inconsistent expectations of the beneficiaries may cause discord among the surviving spouse, children of the first marriage and possible children of the second marriage who all wish to stake claim on the individual’s assets. The naming of an executor can often signal preference within the beneficiaries or interested parties and while the executor must follow the instructions in the will, there certainly can be some actions on the part of the executor that could be to the detriment of beneficiaries (i.e. the insistence of full holdback of estate funds pending tax clearance which is likely not necessary in most cases but within the rights of the executor and maximization of executor fees that might otherwise not have been taken). In this particular case, where beneficiaries have incongruous expectations of their claim to estate assets, a professional could be listed as the executor. In theory, this professional would be impartial to all beneficiaries and have only the incentive of carrying out both the terms and spirit of the will.
Claim to the marital home can be satisfied via the inclusion of a life interest clause in the will of the individual. This allows for the second surviving spouse to continue living in the home but ensures that the ultimate proceeds of the sale of the home (i.e. the residual interest) upon the second spouse’s demise, return to the original beneficiaries. To prevent the second spouse’s ability to reduce the value of the home via deterioration, the will could include some expectations of how the marital home is to be maintained for the purposes of the life interest. The intent of a life interest, however, can have some limitations under the law. In the case Yamada v. Zolad[3], the Ontario Court of Justice allowed an election under the Family Law Act whereby a separated spouse was allowed to take her share of family property instead of her life interest in her husband’s estate. In another case, Noik v. Noik (2004 ON C.A.)[4], the vague wording of the will required a judge to interpret whether the deceased intended to convey a life interest or a financial interest in the home. Therefore, financial intention should be clearly defined via an updated will at all times.
Care must be taken by the will drafter to ensure that all family members including children from the first and subsequent marriages and the current spouse are adequately considered. Current law cites a duty to provide for the adequate care and maintenance of children and spouse which allows legal avenues for a child who is effectively shut out of a parent’s will, to make a claim under Part V of the Ontario Succession Law Reform Act[5]. For instance in the case of Cummings v. Cummings (2004 Ontario C.A.)[6], two adult, albeit dependent children, claimed originally and on appeal that their testamentary trust did not adequately address their on-going needs when the father’s remaining assets transferred to his second spouse via joint ownership. In this case, the judge considered both the financial needs of the dependents as well as the moral and ethical duties of the testator towards his family. While the appeals judge agreed with the original judgement (which did acknowledge that the testamentary trust had been inadequate), reference was made to the Supreme Court of Canada Case, Tataryn v. Tataryn Estate (1994 S.C.C.)[7], where the courts granted estate assets to a son who was purposely omitted from a will.
The will drafting is even more complex in the case of multiple marriages with children from more than one spouse or partner. It could be suggested that the legal professional involved would need to have a higher level of speculation of will changes subsequent to a second marriage that are in favour of the second spouse or his/her beneficiaries. Certainly, these types of changes would be of much higher examination by beneficiaries who have been left out of wealth by reason of possible undue influence by the second spouse. The case of Hall v. McLaughlin Estate, 2006 (ON S.C.)[8] demonstrates this situation where a deceased’s estate passed fully to her second husband and then to her second husband’s children, omitting the children from her first marriage access to her assets. The testator’s intent and previous conversations with family members were taken into consideration and the court established a constructive trust for the testator’s daughters. While provision under the succession legislation exits, it can be reasonably assumed that a higher percentage of contested wills relate to more complex and non-traditional family arrangements.
An intestate situation would be disastrous in the case of multiple marriages with children involved as the courts will determine the estate trustee and distribute property under the applicable provincial laws (i.e. in Ontario, Part II of the Succession Law Reform Act R.S.O. 1990 c. S.26)[9]. While these rules are fairly specific in terms of priority based on relation, they may not result in an intended distribution of wealth. For instance, in the case Lee v. Leung, 2004 (ON S.C.)[10], a $55 million intestate situation involving a second wife and children from two marriages resulted in a multitude of administrative and financial problems. As a result, individuals entering into second marriages must ensure that they have a valid will that clearly outlines their wishes for all involved.
Another societal trend has been the movement towards smaller families and in particular, childless couples and single individuals. The social pressures to have children and the need for assistance on the family farm or business have been greatly reduced in recent decades, leaving many couples and singles with the freedom to pursue careers and personal interests instead of raising children. In many cases, because they have avoided the costs of having children and have not experienced any delays in their career paths, these childless couples have amassed wealth in terms of both investments and property. While excess wealth is considered a luxury to most, it can pose some interesting and difficult situations when drafting the will, particularly in the case of the death of the second surviving spouse or unmarried individual. These individuals often have more distant family members (i.e. nieces, etc.), however in many cases, do not have sufficiently close relationships to warrant a large bequest. (In the case, Montgomery Estate v. Miller, 2006 (ON S.C.), the courts agreed that a bequest extended to the stepchildren of the deceased’s nephew[11].) Because of the requirement of direct beneficiaries and/or joint ownership, probate planning is also particularly difficult in these cases.
The overall requirement of a will is paramount in the case of childless couples or individuals as succession legislation will likely result in very distant relatives receiving wealth. The Table of Consanguinity used under the Ontario Succession Law Reform Act[12], for example, extends as far as fifth cousins. Should there be no living relations, ownership of property transfers to the Crown and is then administered under The Escheats Act[12]. At this point, any pre-existing intent of the individual would most certainly be compromised.
Charitable causes are often a viable answer in the case of the childless second surviving spouse. In these cases, the tax benefit is twofold in that capital gains arising on the deemed disposition of assets can be completely offset by a corresponding donation credit. Also, based on amendments to the Income Tax Act S. 118.1(5), made in 1999, direct beneficial donation of an RRSP, RRIF or insurance policy will also result in a donation credit in the full amount of the policy on the terminal return[13]. Donating appreciated securities in kind to a charity can also be included in the drafting of the will and result in very favourable tax treatment. Changes to the Income Tax Act, Section 38.1 have eliminated capital gains on the donation of certain shares/bonds when made to charities in-kind subsequent to May 1, 2006[14]. The full donation credit would still apply, resulting in a very preferential tax result. In all of these cases, the will drafter must ensure that the charities are either listed as direct beneficiaries (in the case of a registered product or life insurance) or that the donation is dealt with directly in the will. A donation made by the estate based on the informal wishes of the deceased person will result in a less-valuable credit to the estate tax return or beneficiary making the donation.
When charities are involved, the drafter of the will in these cases should be careful to ensure that alternate charitable causes are indicated should the charity named be wound up before the will is executed. Also, the drafter should try to avoid the situation where the charity is a residual beneficiary of the will. This situation can cause lengthy tax clearance periods as the tax professional and CRA determine the end result of the circular calculation caused by the value of the residual which is dependent on the resultant tax bill which is resultant on the value of the donation credit, etc. This also usually results in the necessity to carry back excess donations to a prior year return once the residual is “determined” causing more circular calculations, occasionally resulting in the executor settling for a lower estimated donation credit, to the detriment of fair taxation follow-through.
Another challenging circumstance for the will drafter and professional team is the situation of a large family with many sibling beneficiaries of varying ages, abilities and personal needs. In the case of very young children, most issues can be dealt with via testamentary trusts with rights to income and capital interests based on age. If the individual and his/her spouse are young themselves, the use of term life insurance can be an inexpensive way to ensure that these trusts are adequately funded should sufficient wealth not yet have been accumulated. Clearly this requires planning and revisiting of the will and insurance policies to determine whether they are still reasonable in light of the individual’s wealth and children’s ages and personal situations. The choice and proper designation in the will of executor and guardian is imperative here since much trust and decision-making discretion will be placed in these individual(s) for potentially long periods of time. These two chosen individuals must work together to ensure that the deceased’s wishes are carried out both in terms of financial decisions and child-rearing. Because these wishes are most important to parents, it could be advisable to include non-tangible wishes as part of the will, within a codicil or in a written, albeit unenforceable attachment to the will. With the last option, although it is simply a statement of wishes, the ability to be very specific as to the use of funds, intentions of education, religion and other matters can be of huge comfort to parents who would not otherwise be able to voice this in a testamentary situation. Care should also be given to noting a secondary physical and financial guardianship since under the Ontario Children’s Law Reform Act S61(1) and (2)[15], control is given to the primary guardians to appoint their replacement upon their own demise.
In the case of larger families, often needs differ between beneficiaries. Parents with disabled children feel particularly vulnerable when considering their child’s future without them. A “Henson trust” is a common planning tool in these situations which provides for the financial care of the disabled child without compromising the Ontario Disability Support Program Act of 1997 (ODSPA). The ODSPA, among other things, limits the amount of income provided under the program when the disabled person’s income is over a particular (very low) threshold and where that person owns assets (with some exceptions) in excess of $5,000[16]. One of the exceptions is a trust less than $100,000 in value. Named after the case Ontario (Ministry of Community and Social Services) vs. Henson (1987)[16], the Henson model addresses this limitation through the argument that a truly discretionary trust results in the beneficiary having no true entitlement to income or capital. The trustee, therefore, holds the power and can distribute within the limits of the ODSPA regulations. Technical changes were made to the Income Tax Act in 2002[17] to even allow for the “refund of premium” rules to apply to a Henson trust in the case of a guardian’s RRIF/RRSP proceeds, preventing full deeming income inclusions upon the death of the guardian. As in the case with any trusts for the benefit of vulnerable individuals for the reason of age or ability, much care must be put into the selection of the trustee.
In all cases, testamentary issues can be rectified or lessened by the practice of pre-estate gifts whereby wealth is transferred to intended beneficiaries before the individual passes away. The benefits of this are many in that the individual pays less tax on the income and can transfer this income to a lower-bracket individual, the individual can experience the positive effects of the inheritance on their loved ones, the probate fees are eliminated on any wealth transferred before they pass away and worries of correct wording in the will or the chance of the spirit being misinterpreted are eliminated. Of course, this practice comes along with its own caveats as well. Inequitable living gifts can cause estate inequities that may be unintended if not dealt with in the will. As well, the liquidation of securities can cause tax implications to the individual at high brackets and potentially to the detriment of Old Age Security clawbacks and other income-based benefits. Certainly, the most disastrous result of this would be health beyond expected mortality resulting in an eventual need for the cash flow considered excess and gifted earlier on.
In all complex cases, avenues are available for the individual and their professional team to effectively carry out the various needs of the individual and their family. In some cases, this is easier to carry out while the individual is still living. In other cases, the will must be well-thought out to include life interests, trusts and other planning tools. On the other hand, beneficiaries and potential beneficiaries have the means via the courts to contest will documents which they feel have been interpreted incorrectly or unfairly drafted through will variation legislation. All types of family structures involve different issues and peculiarities to the estate planning process and within these structures, each family has their own set of unique needs and dynamics. Through proper estate planning with the individual, which includes the drafting of the will as well as an understanding of that person’s assets and intents and the use of other wealth transfer techniques, assets can be distributed in an effective manner.
Bibliography
1) Statistics Canada, 2006 Census; Family Portrait; Continuity and Change in Canadian Families and Households in 2006,
http://www12.statcan.ca/english/census06/analysis/famhouse/
cenfam1.cfm (accessed October 2007)
2) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 671-675
3) CanLII, Yamada v. Zolad, 2007 CanLII 4320 (ON S.C.) http://www.canlii.org/eliisa/highlight.do?text=life+interest&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2007/2007canlii4328/2007canlii4328.html (accessed October 2007)
4) CanLII, Noik v. Noik, 2004 CanLII 9816 (ON C.A.), http://www.canlii.org/eliisa/highlight.do?text=Noik+v.+Noik&language=en&searchTitle=Ontario&path=
/en/on/onca/doc/2004/2004canlii9816/2004canlii9816.html (accessed October 2007)
5) CanLII, Ontario Sucession Law Reform Act (R.S.O. 1990 C.S. 26), http://www.canlii.org/on/laws/sta/s-26/20070911/whole.html#BK65 (accessed October 2007)
6) CanLII, Cummings v. Cummings, 2004 CanLII 9339 (ON C.A.), http://www.canlii.org/eliisa/highlight.do?text=adult+dependent+children+estate&language=en&searchTitle=
Ontario&path=/en/on/onca/doc/2004/2004canlii9339/
2004canlii9339.html, (accessed October 2007)
7) CanLII, Tataryn v. Tataryn Estate, 1994 CanLII 51 (S.C.C.) http://www.canlii.org/en/ca/scc/doc/1994/1994canlii51/
1994canlii51.html, (accessed October 2007)
8) CanLII, Hall v. McLaughlin Estate, 2006 CanLII 23932 (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=second+marriage+estate&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2006/2006canlii23932/2006canlii23932.html (accessed October 2007)
9) Suzanne Hanson and Sandra Bussey, Death of A Taxpayer (Toronto, ON: CCH Canadian Limited, 2001), 2
10) CanLII, Lee v. Leung, 2004 CanLII 7797 (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=second+marriage+estate&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2004/2004canlii7797/2004canlii7797.html (accessed October 2007)
11) CanLII, Montgomery Estate v. Miller, 2006 CanLII 18522, (ON S.C.), http://www.canlii.org/eliisa/highlight.do?text=nephew+deceased&language=en&searchTitle=Ontario&path=
/en/on/onsc/doc/2006/2006canlii18522/2006canlii18522.html (accessed October 2007)
12) Suzanne Hanson and Sandra Bussey, Death of A Taxpayer
(Toronto, ON: CCH Canadian Limited, 2001), 4
13) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 1202
14) Michael G. Mallin, Preparing Your Income Tax Returns (2007 Edition for 2006 Returns) (Toronto, ON; CCH Canadian Limited, 2007), 740
15) CanLII, Children’s Law Reform Act, R.S.O. 1990, c. C.12, S. 61(1), (2), http://www.canlii.org/on/laws/sta/c-12/20070911/whole.html (accessed October 2007)
16) Robert Spenceley, The Estate Planner’s Handbook (2nd Edition) (Toronto, ON: CCH Canadian Limited, 2005), 240-241
17) Robert Spenceley, The Estate Planner’s Handbook (2nd Edition) (Toronto, ON: CCH Canadian Limited, 2005), 243-246
posted by PPL Accounting # 9:09 AM
Archives
September 2007 October 2007 June 2008 December 2009 March 2010
Subscribe to Posts [Atom]