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Succession Planning for the Business Owner - the “Estate Freeze”

Let’s start with the law

Subsection 70(5) of the Income Tax Act provides that individuals are deemed to have sold all capital property (like a house, or shares in a company) at fair market value immediately preceding death. This is called “deemed disposition”.

Now, I’ll go off on a tangent for a moment.

For a house, if it was the deceased person’s principal residence, then the “principal residence exemption” applies so that federal tax does not have to be paid on the increase in value of the house (“capital gains”) from the date of purchase till the date of death.

However, at death, it is assumed that the deemed disposition referred to above was to the estate of the deceased, which conveniently for the government, is a separate legal entity for tax purposes. So, capital gains tax would be payable - by the estate - from the date of death till the date the house is sold. The exception is if the house is given to an adult child who has no principal residence, so that it continues as someone’s principal residence in an unbroken chain.

That is the end of my tangent. Now, what if we are looking at company shares?

Well, for shares, there is no “principal residence exemption” of course, but if we are talking about the shares of a small business, there is the “lifetime capital gains exemption” - which as of 2019 stands at around $850,000.

Say you started a business from the ground up, and back then you took $100 in shares, and the business is now worth a tidy $3,000,100, you’d have three million dollars in capital gains. Instead of being taxed on that amount at the time you sell the business, the lifetime capital gains exemption would let you reduce that amount by about $850,000.

You would still have to face paying capital gains tax on $2,150,000 however. Of course, you are still working at your business, so its value will keep increasing. One day, it might well be double what it is today. Well, the lifetime capital gains exemption won’t double just because the value of your shares in your small business have. As a result, your capital gains tax exposure will be higher still!

For small business owners, this can mean an outsized tax burden at some point in the future. An estate freeze is a handy way to halt this “taxation creep”, at least as it applies to you. It also has the added benefit of transferring control of the business to the next generation while you are still alive and can mentor them. Thirdly, it provides a way to fund your retirement by ensuring you can “cash out” of the business at some point.

So, what exactly is an estate freeze?

An estate freeze is an estate planning technique that locks in the current value and tax liability of capital property, like company shares, and attributes the value of future growth to another individual or trust. The current owner can still have some say in how the business is run, but the beneficiaries of the freeze - usually the children but possibly a family trust - can take active control, as well as reap the benefits of future growth from, and pay future taxes on, the capital property following the date of the freeze.

So, remember your small business corporation’s shares? They keep increasing in value as your business is successful year after year, right? And that keeps increasing the capital gains tax you’ll have to pay one day, right? Well, swap those “value-increasing” shares (typically called common shares) for “fixed value shares” (typically called preferred shares) in the same corporation, and presto, you’ve locked in what you’ll take out of the company and the next generation can take over the “value-increasing” shares.

The handing over of control that this process entails means that it can only happen once the “next generation”, for the purposes of the business, have been identified and are ready to take the helm.

An estate freeze doesn’t mean you sell the “fixed value shares” right away. It just means they won’t increase in value. By keeping them, you can still participate in dividend distributions. At some point however, you may want to sell them, and the corporation will then pay you out of the accumulated liquidity it has available. If you do sell, you’d owe capital gains tax at that point.

Secondly, assuming you don’t sell the shares, an estate freeze gives you the added benefit of knowing, with great certainty, what your estate’s tax liability will be at the time you pass on. This is great for estate planning, since it means you aren’t thinking of how your estate might write a cheque to the “Receiver General of Canada” for a moving figure.

Thirdly, an estate freeze gets the next generation started at little cost, and ensures they don’t have to worry about capital gains tax themselves until they are ready to sell, or until much after they put an estate freeze in place themselves.

Some Caution

It is important to know that once implemented, it is very difficult to undo an estate freeze. With that in perspective, it must be seen as bringing together retirement planning and estate planning for owners of small businesses.

Also, an estate freeze can be tricky. It must be done right. There are trip-wire Income Tax Act rules that would need to be avoided.

If you feel as though an estate freeze may be a good option to include in your estate plan, and you are resident in Ontario, we can readily assist as estate planning lawyers. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS.

Someone left you a house? Why you should transfer the title from the estate to yourself.

Losing a family member can be sad, stressful, and difficult.

To add to it all, the process of settling the estate of the deceased can be frustrating and complicated, and can place a strain on familial relationships. This is even more so if real estate is in the mix of the assets of the deceased.


Deemed Disposition of a Non-Principal Residence

Well, when a person dies, the government considers that the person disposed of (as in sold) all of his or her capital assets immediately before death. It’s called “deemed disposition”. Capital assets are significant pieces of property - the ones that tend to appreciate in value. The assets are all still there, but since the government considers they have been sold, capital gains tax is triggered, covering the period from the purchase to the deemed disposition of the asset. The sole exception is the principal residence of the deceased.

Capital gains tax are the taxes owed on the increase in value of capital assets. For example, for a house bought for $300,000 and sold for $700,000, capital gains tax would be due on $400,000.

Since the assets are all still there, deemed disposition can lead to a cash headache. The inheritors might have to sell a property just to pay off the government.

That, however, is just the half of it.

Deemed Disposition of a Principal Residence

Let’s say, as will be the case for many people, the capital asset was the home of the deceased. Well, that starts out as a good thing - the capital gains tax would not apply. However, the home is still transferred from the deceased to his or her estate, so, it has a new owner.

A new owner you ask? Well, the estate is seen at law as being a “legal person”, separate from the deceased and separate from the inheritors.

What does that mean? You guessed it! It restarts the clock on the capital gains tax! If the inheritors have the estate hold on to the home for years, the estate will eventually owe capital gains tax at the time it transfers or sells the home. In the case of a transfer, that of course can lead to that same cash headache. The property may have to be sold or mortgaged, just because it wasn’t transferred in a timely fashion.

When the time of transfer comes, there are a number off steps to be followed.

Probate, Transmission and Transfer

First, probate must be done. That is the step, in court, through which the Will is "approved", and the executor is empowered to act.

Second, transmission must take place. That is, a transfer from the deceased person to the executor of the deceased person, in trust. (That is, not personally.) To undertake transmission, the executor must complete a Sam completes a "Declaration of Transmission" and files it at the Land Titles Office, along with some supporting documents. Once processed, the executor takes title, in trust, and is responsible for keeping the property insured, and taking care of the ongoing house bills.

Third, a transfer must occur. That is, the house must be given to the person the deceased intended should have it. To undertake a transfer, the executor must complete a "Transfer of Land", which must also be accompanied by some other documents, and filed with the Land Titles Office. A Transfer of Land can also be used to sell the house to someone who isn't an estate inheritor, such that the resulting money is distributed to inheritors instead.

Capital gains? Transmissions before transfers? The impact of delays by the executor?

It is all proof positive that on matters concerning Wills and Estates law in Ontario, and in most other places for that matter, a terrain that appears serene can actually be full of unknown trip wires. To avoid stumbling, it is best to consult a professional. With offices in Toronto and Ottawa, and the ability to provide legal assistance in all parts of Ontario, we can readily assist with estate administration concerns. We can be reached by phone at 1-888-59-WILLS. You can also set up a consultation right on our website.

Friends forever? Estate planning and social media or digital accounts.

Access to an internet connection can provide us with plenty of opportunities - from global networks of hobbyists to platforms for sharing thoughts and pictures to marketplaces with goods you can’t find locally. Participation on these platforms can be rewarding and fun, but what happens to our online presence when we pass away?

It is evident that we can’t upload a new post to Instagram or browse for a rare pair of sneakers from the great beyond. However, many of our accounts will remain active, and any assets left on the web, like rewards points, gift cards, and alternate currencies will be stuck in limbo. Furthermore, monthly subscriptions may continue to be charged to the credit card.

In addition to the wealth that can be contained in accounts on websites such as PayPal or in cryptocurrency wallets, collections of online games, music, or films, the sentimental value of memories locked into photographs and other social media posts can be substantial. For this reason, it is crucial to include details of what you wish to happen to these assets and accounts in your Will.

Know Them and Categorize Them

The first step in properly addressing the question of what happens to digital assets after a person passes on is to have the person comprehensively list every “internet access asset” she or he has. Let’s think of “internet access assets” as every account you have online. That could be anything from Facebook to your online banking access details.

Then, categorize them. The truth is, they aren’t all the same. Which ones concern money? Which ones are all social and fun? Which ones are for work or for running a business? Which ones relate to travel? They’ll all have rules that will be similar based on the industry or concern they relate to. For example, for rewards points at certain companies, the value would not be transferable to another person, and may be reclaimed by the company when a person passes away. For online banking access, it may not be in keeping with the banking agreement to simply have the executor of the deceased person take over the username and password in order to get things done for the purposes of the estate.

Still, the first step in providing an executor with the tools to do her or his job is the inclusion of account access details - usernames and passwords - within the categorized list. This, of course, underscores a related point a Wills and Estates lawyer would readily reiterate to every client - estate documents should be kept in ironclad form. Leaving a Will in a drawer, along with account details for every internet access asset, would not be very wise. A safety deposit box or a lawyer’s office would be much more ideal.

What Gets Shuts Down? What Lives On In Digital Valhalla?

Having categorized your internet access assets, the ideal step would be to separate the items in each category into two - the accounts you wish to have shut down, and the ones you wish to have live forever in digital nirvana … or digital valhalla.

For accounts to be shut down, clear instructions can be added to your Will, and their very presence in your Will would be useful to the companies or institutions that maintain the websites at issue. In many instances, and for obvious reasons, email accounts would be on the shut-down list. Part of shutting an account down might include the prior transfer of assets with monetary value or with emotional value. The process might also include the prior purchase of physical goods that would belong to the estate and be available for distribution to beneficiaries, using points, or the payment of the debts of the deceased, using points.

Know What You Want To Give Away

The sad truth is that not much thought has been put into estate planning for the digital world. So, there aren’t really a lot of digital-world-specific rules in place. Some of the bigger players are starting to “get with the program”. For example, Facebook, through Legacy Contact, allows an account holder to designate a person who would have access after death. Google, through Inactive Account Manager, allows much the same thing, and extends the access to cases of incapacity.

That said, the majority of companies and institutions are still grappling with the issue, or perhaps just ignoring it. A recent University of London study found that 85% of cloud services providers don’t have terms in place to deal with incapacity or death. So, what to do? Well, the rules of the non-digital world can in many cases apply to digital assets. That includes, with some contractual and other limitations, the ability to give an asset away as a gift. The larger and more valuable the asset, the more likely time can be put into designing a custom legal solution to have it dealt with exactly as you’d like.

Beneficiaries can be named as recipients of some digital assets, much in the same way that beneficiaries can be left a house, a dog, or a collection of antique spoons. For example, after the tragic passing of Anthony Bourdain, the probate of his Will revealed that he left his frequent flyer miles to his estranged wife. As a travel writer and TV show host, there is wild speculation about the quantity of miles she was bequeathed. Whatever the total may be, Bourdain was right to recognize the value in these digital assets and to pass them on to someone who could make good use of them.

The opposite case on point is that of Gerry Cotten, the founder of Quadriga - Canada’s largest cryptocurrency exchange. He died suddenly at the age of 30, leaving behind unaccessible cryptocurrency worth about $250 million. No plan, no accessible details.

The real life and real death examples of both Bourdain and Cotten go to show that with “internet access assets”, the estate planning stakes are only becoming higher. Even for those without $250 million lying around on a computer, getting it right for those digital things of value - however little or much they may be worth emotionally and financially - is critical. At AFOLABI, our lawyers are able to include a comprehensive digital estate strategy within your overall plan. With offices in Toronto and Ottawa, and the ability to provide legal assistance in all parts of Ontario, we can readily assist. We can be reached by phone at 1-888-59-WILLS. You can also set up a consultation right on our website.

What is the Passing of Accounts?

What is an estate trustee? Or rather, who?

An estate trustee is the person given the responsibility of executing a Will by the person who crafted the Will. Typically, the estate trustee would be a known person, like a family member or a friend.

Is the estate trustee always an accountant or a lawyer?

Funny question, eh? The answer of course is “no”. That aside though, it is the question itself that is instructive.

There is a legal obligation on an estate trustee to keep a complete and accurate set of accounts detailing the assets of the deceased. The “passing of accounts” is the process through which a court approves those accounts. Think of it as a double-check on the work of the estate trustee. Needless to say, since the estate trustee is typically not a professional, the process of passing accounts typically includes professional advice and assistance.

Interestingly, not all accounts must be passed. For example, the beneficiaries could consent to an informal summary and release the estate trustee. Some instances in which accounts must be passed include the existence of minor, unascertained, contingent, or incapable beneficiaries, as well as when a beneficiary challenges the handling of the estate accounts.

The Process

If an estate trustee wishes to or must pass an account, there are a number of important considerations to take into account.

An estate trustee must file a series of documents with the Superior Court of Justice. They include the accounts in the proper court format; Form 74.43 - the Affidavit of the Estate Trustee Verifying Estate Accounts; Form 74.44 - The Notice of Application to Pass Accounts; and the certificate of appointment as estate trustee.

A filing fee of $322 made payable to the Minister of Finance is also required. The trustee may also be required to attend a hearing, or have an estate litigator attend as representative.

The fully detailed process for passing of accounts can be found in Ontario’s Rules of Civil Procedure. Rule 74.17 contains the form for the passing of accounts, which requires accurate records of the assets and transactions in the estate. Rule 74.18 details the process for submitting the application and the requirements for sending notice to involved parties.

If one of the beneficiaries is a minor, the Trustee or the Office of the Children’s Lawyer must be notified and involved in the process. The same is true for the Public Guardian if a beneficiary is deemed to have a disability.

If there are any objections to the accounts, the process for submitting a Notice of Objection can also be found under Rule 74.18. In order to avoid a lengthy court process, it is best for estate trustees to ensure they have a detailed and accurate account of transactions in the estate, as well as justifications for purchases.

Needless to say, with court rules and legal documents flying left, right and centre, it can be a convoluted process. So, as stated earlier, it is best for the estate trustee to seek the help of a Wills and Estates lawyer involved in estate administration matters.

Keep This in Mind

It is important for beneficiaries to note that there must be sufficient justification for raising an objection regarding an account. The temptation to turn the estate administration process into a battleground for past grievances must be resisted. Why? Let’s take a look at the 2017 Pochopsky Estate case.

In that case, four sibling beneficiaries legally compelled their estate trustee to initiate a passing of accounts in an attempt to obtain assets shared by their deceased father and his sister. All of the assets of the deceased had been settled outside of his estate, so their request was largely baseless - they were no assets for them to pursue in reality. Nevertheless, they persisted, despite repeated warnings from the estate trustee. The presiding judge ruled that the beneficiaries themselves would be liable for the $17, 445 in costs that the trustee had taken on. Yikes, eh?

Interested in estate administration generally or the passing of accounts specifically? We can readily assist. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS.

What are designations, and do you know what yours are?

What is a Will, anyway?

Is it the document setting out how all of your assets will be taken care of and distributed after you pass on?

Well, it can be that document. It most definitely can.

However, in our modern world, there are other documents that are often used - alongside Wills - to transfer assets or properties upon death.

They are the documents most people don’t readily bring to mind - single pieces of paper with a few questions asked and answered, that are then typically filed away or lost in the shuffle of life.

They are called “designations”.

See, in addition to the contents of your Will, there are a number of ways to pass assets on to specific family members, friends, or charities. One such vehicle - that we have already looked at - is through a trust. A designation is another such vehicle.

Much like a trust, a designation can be used to bypass the probate system. That is, the court system that includes the paying of taxes related to the value of the estate.

Think RRSP? TFSA? Life insurance? Think designations. When you open those accounts or take out those policies, you are often required to select a beneficiary who would inherit the funds if you were to pass away. The document on which you make that selection is the designation.

So, it goes without saying that all of your designations are important to your overall estate plan. If it suits your circumstances, you can choose to designate your estate as the beneficiary, ensuring all of your assets flow through your Will. If your circumstances are different, it might be better to leave your designations out of your Will.

There are some benefits in designating a loved one as a beneficiary of a specific asset. As mentioned below, the skirting of the probate system is one. Another is the fact that the transaction is kept private. A third is the fact that it is a much faster transaction compared to the process using a Will. The fourth is the fact that it is usually protected from court claims against the estate.

Planning for Time and Chance

So, designations can be just as important to your estate plan as your Will.

Apart from the reasons already enumerated above, they carry such weight (a) because of the size of the assets they can transfer, and (b) the outsize impacts a mistake or change can have on the distribution of an estate.

A designation can transfer assets valued anywhere from a few hundred to millions of dollars. For many in Ontario for instance, the remainder of a pension can constitute a sizable asset.

Also, similar to a Will, designations are susceptible to life changes. A designation made twenty years ago may no longer reflect a person’s preference, for instance. Also, at the age of 71, funds must be withdrawn from a Registered Retirement Savings Plan, but may be transferred to a Registered Retirement Income Fund. This will, of course, require a new designation and that can trigger the need to update a Will.

In addition, and also similar to a Will, designations must be set out in the final state a person would like to have them in before any incapacity sets in. Especially but not exclusively for the elderly, dementia can be a cause for concern long before death. Accidents constitute another set of possible life occurrences that can lead to mental incapacity. To prepare for such eventualities, people would typically prepare Powers of Attorney for Property. Well, the person appointed in such a document as the “attorney” can do a whole lot, but she or he cannot change a Will or a designation. The result is that a designation in place at the time a person becomes incapable of managing property is effectively “locked in”.

Live in Toronto, Ottawa, or elsewhere in Ontario, and think you might need some estate planning assistance that would see your designations plugged into your overall estate strategy in a smart and efficient way? Give us a call at 1-888-59-WILLS, or book a consultation right here on the website! We’d be happy to help you with all of your estate planning needs.
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The Henson Trust: Planning for the Future Care of a Partly-Dependent Child

Caring for a child with abilities that lie outside the norm can be difficult, but it can also be rewarding.

As a partly-dependent child grows into adulthood, social services such as the Ontario Disability Support Program (ODSP) become a crucial aspect of the child’s supporting system, and can help foster a sense of independence.

Inheriting assets from parents or grandparents - while always done with good intent - can be disruptive to that careful balance, since an increase in assets can render the child ineligible for the ODSP.

So, what to do? For the parents and grandparents of partly-dependent children, a tool that ought to be considered is the Henson Trust.

Guelph resident Leonard Henson cared deeply for his daughter, Audrey, who lived in a group home and relied on an allowance from the Family Law Act - now similar to ODSP payments - and on her father’s support.

Leonard carefully planned for the future needs and protection of his daughter by placing a substantial portion of his savings into an Absolute Discretionary Trust before his passing in 1981.

Think of a trust as a tool that separates “ownership” from “benefit”, since this is possible legally. For example, you can give $20 to your brother, and say “you own it, but you can’t use it; you must instead take care of it, and it must be given to my daughter exactly 10 years and 45 days from today”. That is what Leonard did. However, he took it one step further by making it “absolutely discretionary”, which means in the example above, he took out the “exactly 10 years and 45 days from today”. The result, in the example, is that your brother has the full discretion to decide when your daughter gets the $20.

So, an Absolute Discretionary Trust is one regarding which the person setting up the trust - the settlor - has given up all the “strings” of control; and regarding which the person benefiting from the trust - the beneficiary - cannot access at will or based on any condition other than the discretion of the trustee. The trustee, of course, is the person entrusted with the assets in the trust.

Now, back to Leonard’s neat story. The Ministry of Community and Social Services understood the trust he set up to be a gift to Audrey, and so they halted Audrey’s allowance payments. The Social Assistance Review Board reversed the Ministry's decision on the grounds that Audrey did not have direct access to the assets, and as such it shouldn’t be counted as an asset under her ownership. In 1989, this decision was upheld by the Ontario Court of Appeal, and it meant that Audrey’s social assistance payments would continue!

So, when is a gift not a gift and yet the person gifted can benefit from it? When, of course, it is in an Absolute Discretionary Trust.

Audrey’s good fortune created a road map for other partly-dependent children in Ontario, whether their differing abilities be cognitive, developmental, physical, or mental. Such a framework is also available for families in British Columbia, Manitoba, New Brunswick, Nova Scotia, and P.E.I.

The Henson Trust is named after Audrey and continues to provide families with a means of giving a child living with different abilities an inheritance without putting the child’s ODSP supports at risk. Eligibility for ODSP requires an individual to own less than $5,000 in assets - excluding their primary place of residence. Such an extremely low threshold puts partly-dependent persons at risk in the long run, which is why the Henson Trust is such a valuable tool in estate planning.

Now, it isn’t just about the Henson Trust. It’s also about the review of the trust document by the government offices that administer the ODSP. They must assess the trust document, and conclude that it is indeed a “Henson Trust”. This is important since, just as every partly-dependent person is unique, the Henson Trust document drawn up for each is also unique. There simply is no one size fits all. Yet, that unique document must obey some key rules established by the one drawn up years ago by Leonard’s lawyer.

Beyond the government review, it is also about the rules that have been put in place for annual transfers from the Henson Trust. The transfer cap is low, but there are exceptions for attendant care, wheelchair accessibility devices such as ramps, vehicular alterations, and modifications to the home.

Thirdly, it is about who is chosen as a trustee. It is important to identify a good trustee. Someone, or an institution like a bank, that can manage the trust with a clear mind and good character for a long time - until the trust runs out or the beneficiary passes on. The trustee will be responsible for releasing funds, managing and investing assets, and preparing records and tax returns, among other things. The trustee must understand the requirements and limitations of that role, including some knowledge of regulations under the ODSP and the Trust Act.

A Henson Trust is often established in a Will, but it can be created at any time. The benefit is that a Will is activated after the settlor passes on. Trusts that are activated before the settlor passes on are taxed at a higher rate!

If you believe that a Henson Trust may be a good option for you, and you are resident in Ontario, we can readily assist as estate planning lawyers. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS. There are a number of ways in which leaving an inheritance to a child with different abilities can unintentionally go awry. We are committed to ensuring that does not happen to your child or your family.

What, exactly, is a trust?

A trust is an arrangement between three entities - the grantor (or settlor), the trustee and the beneficiary.

The process is initiated by the grantor - the individual who wishes to give away assets by placing the assets in a trust. The grantor places the responsibility for those assets in the hands of the trustee.

The trustee is accountable for ensuring that the assets are received by the beneficiary in the manner intended by the grantor, which is outlined in the trust document.

Here is where it can get interesting - in some cases, the grantor and the trustee may be the same individual. So, a person can say to herself or himself - “I no longer own this property for myself, I now own it only to take care of it for the beneficiaries.”

In other cases, the trustee may be a trusted person or persons, or a trusted institution such as a bank.

There are two main categories of trust. The first is an inter vivos trust, also called a living trust, established during the life of the grantor with the assumption that the grantor will be able to control or witness the distribution of the assets in the trust. In most instances, the terms of such a trust may be altered at any time at the will of the grantor, and so it is typically termed “revocable”.

The second type is called a testamentary trust, which is usually created as a part of the grantor’s Will. Since it “kick-starts” upon the death of the grantor, it is always “irrevocable”. Once kick-started or established, an irrevocable trust is nearly impossible to change.

The above two categories have many sub-categories. So,

  • a spousal trust ensures that any income generated by the assets in the trust go to the surviving spouse following the death of the grantor, with the principal often being passed on to the children;

  • a real estate investment trust (REIT) is a great vehicle for storing assets such as rent payments; it often comes in the form of large holdings that get traded on the stock exchange, but there is no reason why a landlord with a few holdings can’t set up one for the next generation;

  • a charitable remainder trust is similar to the spousal trust, with the twist that instead of the children, the principal goes to a charity after the surviving spouse (or anyone else set up to benefit from the income) passes on.

There are many others.

Why set up a trust?

The main reason for creating a trust is to ensure that the assets within it will be managed in a specific way, and that such management will be guaranteed even following the death of the grantor.

This can be especially useful when the beneficiary is very young, irresponsible, or otherwise unable to manage the assets alone. See our post about Henson Trusts for more information about leaving assets to a person living with abilities that are reduced or otherwise outside the norm.

Another reason to establish a trust is that the assets in the trust will bypass the probate system following the death of the grantor. This accomplishes three things:

  1. it provides a great deal of confidence and ease in the transfer of assets, compared to the probate system;
  2. it sidesteps probate court fees, which can add up - in Ontario it is $250 for the first $50,000 of an estate and $15 for each additional $1,000, with no upper limit; and
  3. it keeps the transfer of assets highly private, which a basic Will cannot do since probate is a public, court process.

Placing assets in a trust is a great method of protecting an inheritance and ensuring that it is directed to the intended beneficiary.

Who needs a trust?

Many people could use a trust.

As the number or volume of your assets increase, or the complexity of your estate deepens, establishing a trust becomes an increasingly attractive option. So, trusts are not limited to the wealthy. They should be considered by anyone developing an estate plan as a vehicle for simplifying the distribution of assets, or sidestepping thorny family issues by targeting a portion of the estate for transfer to a specific beneficiary in a carefully controlled manner.

If you feel as though a trust may be a good option to include in your estate plan, and you are resident in Ontario, we can readily assist as estate planning lawyers. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS. Trusts can be complicated. It is in the best interest of the grantor, trustee and beneficiary that the trust document is - with an eye to the legal pros and cons - an accurate reflection of all that is intended.

Your spouse can ignore your Will! Yes, you read that right.

A Will. The final testament of everyone who has lived. The final word. The final say. Sacrosanct. Unchangeable. To be respected. Right?

Not quite. A Will can be ignored for a number of reasons. Among them, perhaps the most eyebrow-raising is that a spouse can opt to ignore the contents of a Will!

Gimme 50
Following the death of a husband or wife, there is a 6 month period within which the surviving spouse can either accept the contents of the Will, or elect to receive a 50% share of the “net family property”. So, the surviving spouse can simply assess which option would deliver a greater portion (or all) of the assets available.

This ability is similar to the rights of a spouse following a divorce - in which the “net family property”, the assets accumulated over the course of the marriage, is divided pretty much 50/50. It is based on the same law - Section 6 of Ontario’s Family Law Act.

The ability is referred to as a “spousal election.”

What if the spouse died without a Will? Well, in that event, the law (Part II of the Succession Law Reform Act) sets out a formula for the distribution of the assets of persons that die “intestate” - that is the legal jargon for dying without a Will. According to that formula, the surviving spouse is entitled to the first $200,000 of the deceased’s estate, with any remainder to be divided up based on whether or not the deceased had children, and if so the number of children. This is called the “entitlement”. Here is where it gets interesting - the surviving spouse can still choose between this entitlement and a 50% share of the net family property!

You Can’t Pick Cherries
It should be noted that this is strictly “either / or”. The surviving spouse can’t opt for a spousal election partly, and for the Will partly; or opt for the entitlement partly, and for the Will partly. In essence, there is no cherry picking. There is an exception to this rule though - the Will of the deceased can specifically state that the surviving spouse’s entitlement in the Will is to be added to the amount the surviving spouse is entitled to under spousal election.

More on that “Net Family Property”
To clarify the amount of money a surviving spouse may be entitled to under spousal election, Section 5(2) of Ontario’s Family Law Act states that “if the net family property of the deceased spouse exceeds the net family property of the surviving spouse, the surviving spouse is entitled to one-half the difference between them.”

To provide an example of what this might mean, let us assume that Samantha passes away with a net family property of $1,300,000. Her surviving husband, Mario, has a net family property of $500,000. The difference between them is $800,000. They live in Ottawa, so Ontario Wills & Estates Law applies. Mario would be entitled to a claim against Samantha’s estate for $400,000. This is also referred to as an equalization payment because the net family property of both Samatha and Mario would be $900,000 following the payment.

The net family property, for each spouse, is the amount accumulated over the course of the marriage minus the amount brought into the marriage, and minus any debts. It gets quirky though. A number of assets are excluded from the calculation, such as gifts and inheritances, insurance proceeds and some court settlements.

So, a surviving spouse can ignore a Will, and opt for a spousal election instead, but doing so can get pretty labyrinthine pretty fast. Think this might be your situation now or some day? Best to retain a Wills and Estates lawyer before you make the decision - the lawyer can help calculate your net family property and determine the best choice in your particular situation.

About That Deadline
You noticed the bit about the 6 months, eh? Well, it is a rigid deadline, until it isn’t. In essence, a judge can move the deadline if there is a valid reason to do so. For example, if the execution of the estate was delayed and that was not the fault of the surviving spouse. After all, how can you decide between two options if you have no clue about one of the options?

Two fairly recent cases in Ontario reinforce this possibility. They are Mischuk v. Mischuk, 2013 ONSC 4122 and Aquilina v. Aquilina, 2018 ONSC 3607. In both cases, the application for an extension was heard within the 6 month time period following the passing of the deceased and was granted.

There is also a more recent court case in Ontario - Lundy v. Lundy, 2017 ONSC 2101 - which demonstrates that an extension of the period within which a living spouse may seek a division of net family property will not be granted when the application is made outside of the initial 6 month period.


Estate Planning and the Blended Family - four things to keep in mind.

A picture of the modern family can sometimes be far removed from the image of the nuclear family from yesteryears - mom, dad, 2.2 kids, a dog, and a white picket fence. Today, it is gladly accepted that families come in many configurations. They are all beautiful, yet in estate planning, some present more challenges than others.

Consider the blended family, bringing together children from previous marriages, and creating a joy so unique, it has its own postal code. For the testators - that is, mom and dad who have brought their children together, estate planning tends to be the time to step back and consider asset protections for biological children.

A core principle of Ontario's Family Law Act is that marriage is an equal economic partnership. As a result, upon the death of a spouse, the surviving spouse has certain rights, among them the right to seek what essentially amounts to 50% of the assets accumulated over the course of the marriage, regardless of what the Will of the dead spouse has stipulated. For testators in blended families, this can cause a fair amount of consternation.

Let’s consider the made-up situation of the Imagines. Daniel and Sandra Imagine married 10 years ago, coming together along with Daniel’s two children from a prior marriage [Kevin (now 17) and Tamara (now 19)], and Sandra’s two children from a prior marriage [Cassie (now 14) and Hannah (now 12)]. They live in Toronto, so Ontario Wills and Estates Law applies. At the time of their marriage, Daniel had $350,000 in assets while Sandra had $50,000. They bought a home, with each contributing $50,000 towards the purchase. Over the course of their marriage, the couple have accumulated $800,000 in assets, with the lion’s share of that - $600,000 - coming from a business started and operated by Sandra. It has always been Sandra’s thinking that through the business, she would be in a position to leave Cassie and Hannah with exclusive inheritances that would rival what Daniel can bequeath to Kevin and Tamara. Is she mistaken in her thinking?

The short answer is “yes”, unless she takes estate planning steps beyond simply getting her Will drafted and executed. Should she predecease Daniel, she could leave the $600,000 she has accumulated to Cassie and Hannah through her Will, but Daniel can simply - and legally - ignore that Will and take half of that amount since it was accumulated over the course of their marriage. Considering the reverse, should Daniel predecease her, she wouldn’t be able to take half of his $300,000 in assets since it was accumulated by him prior to their marriage.

With a combined total of $1,200,000 in assets, David and Sandra are in a position to leave $300,000 to each child, regardless of biological parentage. However, if they intend to take a different approach to their bequests for whatever reason, the law - in its “untamed” form - can quickly begin to get in the way.

To further complicate matters, in Ontario, marriage revokes a Will. So, if Sandra and Daniel both have Wills leaving everything first to one another, and then to their children equally after the last of the two of them dies, and Sandra dies, and Daniel remarries again, his Will is revoked! If he doesn’t execute a new Will, he would die “intestate”, meaning that the law uses a fixed formula to determine who gets his assets (including the assets intended by Sandra for their children). That formula would see Daniel’s surviving wife, and any children they have together, get those assets! This would be far removed from what Sandra intended.

Conundrum upon consternation, right? The estate planning concerns of blended families tend to be more complex, and the emotional weight behind decisions tend to be heavier. In the midst of it all are the children, and a large part of the challenge is getting it right for them. So, what to do?

1. Talk about it.

There is simply no substitute for good, honest, open conversation. Talk to a good estate planning lawyer to get the facts, the law, and the options straight, then take the time to hash out the hopes, the fears, the details, and the possibilities. Do all of that, then return to the estate planning lawyer with the makings of an approach for legal implementation.

2. Don’t be afraid of marriage contracts.

One of the best ways to ensure that your assets are distributed as you would like involve “taming” the law by using an agreement. While marriage contracts tend to be seen as indicative of a lack of faith in a spouse or a marriage, they often are simply indicative of a settled intention to put the interests of the children above all other considerations. It would be possible, for example, to agree that a surviving spouse will not exercise his or her right to claim 50% of the assets accumulated over the course of a marriage, thus saving the assets for the children.

3. Don’t be intimidated by trusts.

We’ve all heard the phrase - “trust fund baby”. It conjures up the image of the children of ultra-rich parents, born with a silver spoon right in their mouths. In truth, trusts can be useful to everyone, and can - for example - be funded via insurance proceeds, or gains from the sale of a real estate holding. Want to ensure your loved ones actually get what you want them to have regardless of complex domestic circumstances and quirky legal stipulations? A trust should be right up there with your Will, and your trustee can be a financial institution rather than a person.

4. Keep your designations in the game.

What are designations? Remember that time you were setting up your RRSP and the banker asked who you’d like to give the funds to should you pass on? It had you thinking quickly, and perhaps you gave a half-certain answer, which was recorded on a piece of paper, which you signed. If you are like most people, you aren’t too sure of where that piece of paper is at the moment. Well, that paper is a designation. Most Canadians hold a substantial portion of their assets in RRSPs, TFSAs, LIRAs, insurance policies, and so on. These “registered” or contractual assets don’t have to be bequeathed through a Will - the simple designation does the trick. If you pass on, the bank simply follows the indication in the designation, and the fund ends up with who you want. This makes those funds, along with the designations attached to them, a very important tool in estate planning - especially for keeping options open in the midst of complex domestic circumstances.

“Per Stirpes” versus “Per Capita” - a crucial distinction in estate planning.

Estate planning is a complicated process, and it can be frustrating when you get overwhelmed with legal jargon and latin phrases.

So, how about a couple more latin phrases? These ones though, will be thoroughly explained.

One very important consideration for most estates is the distinction between the per stirpes and per capita methods of distribution. When should an estate be distributed per stirpes or per capita? Why include this in your Will? What is the difference between them? This blog post will answer those questions in an accessible and informative format, and help guide you in the crafting of a Will that reflects your wishes.

Firstly, the language used in your Will is very important. While a fair judge will take the entire Will into consideration in the case of a family conflict, it is best to be clear and concise in the language you use to avoid a conflict in the first place. If there is a chance that anyone you wish to gift a portion of your estate to may pass before you do (predecease) it is a good idea to clarify how you wish that gift to be redistributed among your other descendants. Outside of naming each individual recipient individually, per stirpes and per capita distribution are the two most popular methods of such clarification.

Per Capita
Per Capita is Latin for “by the head.” You can think of this like a head count - if you are present, you will receive your share. If not, it will be divided up among those who are present. A per capita scheme identifies one or more rows on the family tree (called a class), such as your children, your grandchildren, or your great-grandchildren, and ensures that each of them will receive an equal portion of your estate. They must still be alive to receive their share. To make it easy, let’s assume that you have chosen your children as the class and that each of them will receive an equal share. If one of them were to pass away before the release and execution of the Will, their share will not pass to their children or their spouse. Instead, their portion of your estate will be divided up among your other children equally. If you choose all of your surviving descendants, each one of them will receive an equal share. This method of distribution is called direct entitlement.

It is most appropriate to use “per capita'' when you intend each person to receive an exactly equal portion of your estate, even if this means that one branch of your family will receive more than another. This is demonstrated in the figure below:

Figure 1: Per Capita Distribution (Children only)
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Child 1 and 3 would each receive half of the Testator’s estate. The share that would be given to Child 2 is equally divided between Child 1 and 2

Figure 2: Per Capita Distribution (All descendants)
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Each living descendant would receive an equal portion of the Testator's estate.

Per Stirpes
Per Stirpes is Latin for “by the stock” or “by the root.” You can think of this like a family tree. Even if a person is deceased, their share will travel down the tree to their roots - usually their children. A per stirpes scheme means that a person’s children will represent them if they have passed away before a will is divided up. To use the same example, if you choose your children as the class and you choose to divide your estate equally among them, but one has passed away, their share will be split equally among their children. This is called entitlement through representation and means that a share will go to the family of the intended recipient if they are no longer around to receive it.

It is most appropriate to use “per stirpes” when you intend each branch of your family to be treated equally, even though this may mean that members of the same generation may be treated differently. This is because an equal distribution of your estate among your children will result in an unequal distribution to your grandchildren if your children have differing numbers of offspring.

In most instances of the use of “per stirpes” distribution, the stipulation would be that the estate be divided evenly among the testator’s children, with the added proviso that if a child has predeceased the testator, that child’s portion is to be transferred to the child’s children (the testator’s grandchildren) “in equal shares per stirpes”. Using the figure above, and assuming instead that it is “Child 3” who has predeceased the testator, the result would be one-third to “Child 1”, one-third to “Child 2”, and one-sixth each to “Grandchild 6” and “Grandchild 7”. In this use case, for a grandchild to inherit, the grandchild’s parent must have passed on.

It is also possible, however, for the testator to use “per stirpes” distribution to ensure each branch of the family receives an equal share of the estate, with all living family members - children and grandchildren - inheriting. This is demonstrated in the figure below:

Figure 3: Per Stirpes Distribution (All descendants)
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Assuming equal weight is given to Children and Grandchildren, the above would be the division of the Testator’s estate such that each branch of the family receives a total of 1/3rd.

In essence, the difference between the two is that a per capita scheme refers to equal shares for living, named individuals, and a per stirpes scheme refers to a person’s family line or branch or “stripe”. Per capita means each individual is given an equal share and per stirpes means that each branch of the family is given an equal share.
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