By: Nicole Garton, President, Heritage Trust
Tolstoy wrote at the beginning of Anna Karenina: ‘Happy families are all alike; every unhappy family is unhappy in its own way.’ That unhappiness often finds its painful way into a courtroom.
Abella J. in Pecore v. Pecore, 2007 SCC 17 at para 77
Table of Contents
I. IntroductionII. The Intersection of Family and Estate Law in BC1. Who is a Spouse?2. Key Provisions of the Family Law Act3. Key Provisions of the Wills, Estates and Succession ActIII. Common Client Concerns1. The Future Estranged Son/Daughter In-LawA. The IssueB. The Potential Solutionsi) Recent Amendments to the Family Law Actii) Family Law Agreementsiii) Discretionary Trusts2. The Future Casserole BrigadeA. The IssueB. The Potential Solutionsi) Inter Vivos Joint Partner Trustii) Mutual Wills Agreement3. The Blended FamilyA. The IssueB. The Potential Solutionsi) Family Law Agreementsii) Remove Assets from the Estateiii) Inter Vivos Alter Ego/Joint Partner Trustsiv) Spousal Trust in a Willv) Mutual Wills Agreement4. The Unhappy Later Life SpouseA. The IssueB. The Potential Solutionsi) Remain in the Common Law/Legal Marriageii) Register a Land Spouse Protection Act Chargeiii) Initiate a SeparationIV. Conclusion
I. Introduction
For many estate planning clients, family law issues will intersect with wills and estates issues. The “3 D’s” of death, disability and divorce are inter-related. Accordingly, estate planning lawyers should be well versed not only in estate law but also family law to be able to fully advise their clients, particularly if those clients are in later life relationships.
II. The Intersection of Family and Estate Law in BC
1. Who is a Spouse?
The definition of who is a “spouse” is critical in both family law and estate matters. Why?
- Upon a separation, only a spouse will have an entitlement to family property;
- Upon a death, if it’s an intestacy (no Will), only a spouse is entitled to all or part of the deceased spouse’s estate; and
- Upon a death, if there is a Will, only a spouse has standing to bring a wills variation claim for a greater share of the estate (in addition to biological or adopted children of the deceased).
The Family Law Act, S.B.C. 2011, c. 25 (the “FLA”) and the Wills, Estates and Succession Act, S.B.C. 2009, c. 13 (“WESA”) both define a spouse as married and unmarried partners who have lived together in a marriage-like relationship for at least two years.
As observed by Justice Kent in Connor Estate, 2017 BCSC 978 at para. 53, “like human beings themselves, marriage-like relationships can come in many and various shapes.” The definition of a spouse can include former spouses, same sex spouses and more than one spouse. For example, Justice Kent in Connor Estate held that a relationship was marriage-like, despite the parties having separate residences and one party being legally married to a third party for part of the “marriage-like relationship.”
The FLA in section 3 defines a spouse as follows:
3 (1) A person is a spouse for the purposes of this Act if the person(a) is married to another person, or(b) has lived with another person in a marriage-like relationship, and(i) has done so for a continuous period of at least 2 years, or(ii) except in Parts 5 [Property Division] and 6 [Pension Division], has a child with the other person.
(2) A spouse includes a former spouse.
(3) A relationship between spouses begins on the earlier of the following:(a) the date on which they began to live together in a marriage-like relationship;(b) the date of their marriage.
(4) For the purposes of this Act,(a) spouses may be separated despite continuing to live in the same residence, and(b) the court may consider, as evidence of separation,(i) communication, by one spouse to the other spouse, of an intention to separate permanently, and(ii) an action, taken by a spouse, that demonstrates the spouse's intention to separate permanently.
WESA in section 2 defines a spouse as follows:
2 (1) Unless subsection (2) applies, 2 persons are spouses of each other for the purposes of this Act if they were both alive immediately before a relevant time and(a) they were married to each other, or(b) they had lived with each other in a marriage-like relationship for at least 2 years.
(2) Two persons cease being spouses of each other for the purposes of this Act if,(a) in the case of a marriage, an event occurs that causes an interest in family property, as defined in Part 5 [Property Division] of the Family Law Act, to arise, or(b) in the case of a marriage-like relationship, one or both persons terminate the relationship.
(2.1) For the purposes of this Act, spouses are not considered to have separated if, within one year after separation,(a) they begin to live together again and the primary purpose for doing so is to reconcile, and(b) they continue to live together for one or more periods, totalling at least 90 days.
(3) A relevant time for the purposes of subsection (1) is the date of death of one of the persons unless this Act specifies another time as the relevant time.
The FLA requires the two years be a continuous period while WESA does not, although WESA does require that the two years be the two years immediately preceding the deceased’s death. The relationship begins on the earlier of the date of the marriage and the date the parties began living together in a marriage-like relationship.
Under the FLA, section 3 provides that spouses can be separated despite continuing to live in the same residence but otherwise does not specify what constitutes a separation. The court may consider as evidence of separation communication by one spouse to the other spouse of an intention to separate permanently and an action taken by a spouse that demonstrates the intention to separate permanently.
Section 2(2) of WESA addresses separation in the estates context. For married spouses, separation occurs when an interest in property arises under the FLA (on separation). For spouses in a marriage-like relationship, two persons cease being spouses when one or both parties terminates the relationship. As separation revokes rights as spouses under WESA, there is a large amount of case law on whether there had been a termination of the relationship prior to death. This is a determination that requires the court to consider both the expressed and implied intentions of each spouse and any available objective evidence. The courts have interpreted this section broadly. The Court of Appeal affirmed in Robledano v. Queano that “whether a relationship is “marriage-like” is a question of mixed fact and law that requires a “broad” or “holistic” approach …. The same can be said of the question of whether a spouse has terminated a marriage-like relationship.”
Parties may also reconcile and will not be considered separated under WESA if, within one year of separation, they begin to live together again with reconciliation as the primary purpose and they do so for one or more periods totaling at least 90 days. If a spouse is named as a beneficiary in a will prior to separation, the gift will be revoked on separation unless there is a contrary intention, or a new will is created post-separation.
2. Key Provisions of the Family Law Act
Estate practitioners should be familiar with the provisions in the FLA setting out the division of property and debt upon spouses separating. For example, if a client is not happy with their spouse’s estate plan, what assets they may receive under the FLA upon separation will be an important strategic consideration. Further, wills varation claims are informed partly by what assets a spouse may have been entitled to under the FLA, had the parties separated prior to the death.
Generally speaking, the FLA provides that that, upon breakdown of a spousal relationship, it is considered fair to equally divide property that the spouses acquired during the relationship and unfair to divide property that a spouse brought into the relationship or obtained by way of gift or inheritance.
Section 81 of the FLA provides regarding the division of family property as follows:
81 Subject to an agreement or order that provides otherwise and except as set out in this Part and Part 6 [Pension Division]
(a) spouses are both entitled to family property and responsible for family debt, regardless of their respective use or contribution, and
(b) on separation, each spouse has a right to an undivided half interest in all family property as a tenant in common, and is equally responsible for family debt.
Family property is defined generally in section 84 as all property owned by at least one spouse or in which one spouse has a beneficial interest. This includes corporate shares, investment and bank accounts, trust property and any increase in value of excluded property during the relationship. Family debt is defined as debt incurred during the relationship and debt acquired after separation if incurred to maintain family property.
Excluded property is described in section 85, which excludes from family property, among other assets, property acquired by a spouse before the relationship began, inheritances to a spouse, third party gifts to a spouse, a spouse’s interest in a discretionary trust and property derived from excluded property. Section 85(2) provides that the onus of proof is on the party seeking to demonstrate that the property is excluded property.
The date of separation is key in determining which assets are family property and which debts are family debt. However, valuation of property for asset division purposes is not at the separation date but rather at the date an agreement dividing property is signed or the date of trial, unless the parties agree otherwise (section 87).
There are exceptions to the general rule that family property and debt are shared equally. Section 92 permits spouses to enter into agreements regarding the division of property or debt that sets out a different division (or no division of property and debt). Both the presumptive equal distribution of family property, and the presumptive non-distribution of excluded property, can be varied at trial where a judge concludes that it would otherwise be “significantly unfair”: s. 95 in the case of unequal division of family property, and s. 96(b) in the case of division of excluded property. Establishing significant unfairness is a high bar: Banh v. Chrysler, 2022 BCCA 74 at para. 27, leave to appeal to SCC ref’d 40156 (12 January 2023).The test for “significant unfairness” has been defined by Mr. Justice Harris in Jaszczewska v. Kostanski, 2016 BCCA 286 as “something objectively unjust, unreasonable or unfair in an important or substantial sense.”
Section 198 of the FLA sets out the limitation periods for property (and spousal support) claims. For married spouses, the action must be commenced within two years of an order of divorce or annulment. For spouses in a marriage-like relationship, the two-year limitation period runs from the date of separation. In property division claims under the FLA, the death of one spouse does not terminate the surviving spouse’s claim if the claim is commenced within the limitation period. An application to set aside an agreement must be commenced no later than two years after the spouse first discovered, or reasonably ought to have discovered, the grounds for making the application. The limitation periods in s. 198 are suspended during the period that either spouse is engaged in “family dispute resolution” with a “family dispute resolution professional.”
3. Key Provisions of the Wills, Estates and Succession Act
WESA contains a number of provisions that overlap with the FLA.
Part 3 of WESA governs where a person dies without a will in place. If the deceased died leaving only a surviving spouse and no children, the spouse is entitled to the entire estate. If the deceased died leaving a spouse and a child or children, the spouse receives:
- the “household furnishings” which are defined as “personal property usually associated with the enjoyment by the spouses of the spousal home”;
- a preferential share of the estate (being $300,000 if all children are the children of both spouses, or $150,000 if not); and
- one-half of the residue (after payment of the preferential share).
If there are two or more spouses of the deceased, they must agree on how to share the spousal share or the court may make an order regarding division.
The surviving spouse is also entitled to acquire the spousal home from the personal representative, provided they meet the requirements set out in Division 2 of Part 3. Specifically, the right must be exercised within 180 days from the date the estate grant is issued, during which time the personal representative may not sell the spousal home. The spouse is required to serve a written notice on the personal representative that includes the value the spouse places on the deceased’s interest in the home as at the date of death. Disputes regarding value are governed by section 30, and that section also addresses the requirements where the surviving spouse is also the sole personal representative of the estate.
A surviving spouse may apply to court for certain orders regarding the retention of the spousal home where:
- the surviving spouse resides in the home;
- the estate assets other than the spousal home are not sufficient to satisfy the interests of the deceased’s descendants in the estate; and
- acquiring the spousal home would cause financial hardship to the spouse.
The court can make orders including vesting the deceased’s interest in the spousal home in the surviving spouse, specifying the amount of money the spouse must pay to the descendants towards satisfaction of their interest in the estate, and converting the remaining unpaid interest of the descendants into a registrable charge against title to the surviving spouse’s interest in the home. The occupation costs that the surviving spouse must pay while living in the spousal home pending purchase are set out in section 32 of WESA.
Where there is an intestacy, the surviving spouse has first priority to make an application for a grant of administration. A child of the deceased, with the consent of a majority of the children of the deceased, is second in priority. If there is more than one spouse of the deceased, the spouses may agree on who is to apply or the court may make an order.
If there is a separation prior to the death of a spouse, the surviving spouse’s right to receive or share in the intestate estate of a deceased spouse terminates. Section 56 of WESA provides that gifts to a spouse in a Will or appointments of a spouse in a Will (such as executor) are revoked upon separation, unless there is a contrary intention in the will. If a client wishes to continue to include their ex-spouse as executor or trustee, or to provide a gift to the ex-spouse in their Will, they typically must sign a new Will after separation.
III. Common Client Concerns
1. The Future Estranged Son/Daughter In-Law
A. The Issue
Clients who have built up wealth often voice concerns that those hard-earned assets could end up in the hands of their child’s future estranged spouse via a family law action. Knowledge of applicable family law will allow estate planning lawyers to advise and assist their clients to plan against this risk.
B. The Potential Solutions
i) Recent Amendments to the Family Law Act
Although the FLA provides that family property is presumptively divided equally between spouses, it also also designates certain types of property as excluded property and thus not subject to division upon separation, including inheritances to a spouse. Assuming that the excluded property remained in the sole name of the spouse who inherited it, after separation the other spouse is usually only entitled to one-half of the growth in value of the excluded inherited property during the relationship.
After the FLA came into force in 2013, confusion arose because often a child puts excluded property such as inheritances into joint names with their spouse, for example as joint tenants on title to the family home or a jointly owned investment portfolio. Case law on this jointure issue was divided. One line of cases (the majority) held that the child lost the exclusion and the inheritance was to be divided with their spouse because, by putting the inherited asset into joint names, they were deemed to have gifted it to their spouse. In another line of cases, the exclusion was maintained.
In the face of this conflicting case law and uncertainty, amendments to the FLA clarified the treatment of inherited assets in the case of separation. On May 11, 2023, the FLA, was amended and received Royal Asset becoming law, inter alia, as follows:
85(3) If property is excluded from family property under subsection (1), the exclusion applies despite any transfer of legal or beneficial ownership of the property from a spouse to the other spouse.
As a result of these amendments, if an inherited asset is put into joint names with a spouse, upon separation, those inherited funds can now be traced back to the excluded property of the contributing child.
Inheritors should nonetheless continue to tread cautiously when transferring excluded property to joint names. Clearly documenting intentions, including the use of family law agreements, remains best practice to protect excluded assets such as inheritances from future family law claims.
ii) Family Law Agreements
Family law agreements, including cohabitation and prenuptial agreements, are the most effective way to mitigate against the risk of family law claims adversely impacting intergenerational wealth planning.
Section 92 of the FLA specifically recognizes the legitimacy of agreements managing spousal interests in property:
92 Despite any provision of this Part but subject to section 93 [setting aside agreements respecting property division], spouses may make agreements respecting the division of property and debt, including agreements to do one or more of the following:
(a)divide family property or family debt, or both, and do so equally or unequally;
(b)include as family property or family debt items of property or debt that would not otherwise be included;
(c)exclude as family property or family debt items of property or debt that would otherwise be included;
(d)value family property or family debt differently than it would be valued under section 87 [valuing family property and family debt].
Section 94 of the FLA precludes a court from making an Order regarding a division of property that is governed by an agreement, unless the agreement is set aside in accordance with the specific provisions of Section 93.
Section 93 provides as follows:
93 (1)This section applies if spouses have a written agreement respecting division of property and debt, with the signature of each spouse witnessed by at least one other person.
(2)For the purposes of subsection (1), the same person may witness each signature.
(3)On application by a spouse, the Supreme Court may set aside or replace with an order made under this Part all or part of an agreement described in subsection (1) only if satisfied that one or more of the following circumstances existed when the parties entered into the agreement:
(a)a spouse failed to disclose significant property or debts, or other information relevant to the negotiation of the agreement;
(b)a spouse took improper advantage of the other spouse's vulnerability, including the other spouse's ignorance, need or distress;
(c)a spouse did not understand the nature or consequences of the agreement;
(d)other circumstances that would, under the common law, cause all or part of a contract to be voidable.
(4)The Supreme Court may decline to act under subsection (3) if, on consideration of all of the evidence, the Supreme Court would not replace the agreement with an order that is substantially different from the terms set out in the agreement.
(5)Despite subsection (3), the Supreme Court may set aside or replace with an order made under this Part all or part of an agreement if satisfied that none of the circumstances described in that subsection existed when the parties entered into the agreement but that the agreement is significantly unfair on consideration of the following:
(a)the length of time that has passed since the agreement was made;
(b)the intention of the spouses, in making the agreement, to achieve certainty;
(c)the degree to which the spouses relied on the terms of the agreement.
(6)Despite subsection (1), the Supreme Court may apply this section to an unwitnessed written agreement if the court is satisfied it would be appropriate to do so in all of the circumstances.
To summarize, there are three important criteria for an enforceable family law agreement:
- There is full, transparent, and accurate financial disclosure from both parties;
- Each party has independent legal advice to ensure the negotiation process is balanced and that the agreement is fully understood; and
- There are no common law grounds to overturn the agreement such as duress, unconscionability or undue influence.
Ideally, if the child has an interest in a family business via direct share ownership or as a beneficiary of a discretionary trust, the financial disclosure should include:
- A current organizational chart describing the business and related estate planning;
- Current financial statements for all relevant business entities;
- Reasonably current valuations for all property and entities; and
- Assessments of income derived from all business entities and property.
In practice, clients generally provide some combination of organization charts/business descriptions and rough value estimates. Prudent estate planners should document their advice regarding the risks of less than fullsome financial disclosure. Generally speaking, overestimates of value are better than underestimates of value. Privacy concerns can be addressed by including confidentiality provisions and providing for the private arbitration of disputes arising in relation to the agreement.
Note even if the above criteria are met when the agreement it entered into, it may still be set aside if a court deems the agreement significantly unfair.
Best practices for family agreements to avoid a finding of significant unfairness are:
- Regularly review the agreement, record evidence of those reviews and amend the agreement as required if circumstances significantly change from when the agreement was entered into;
- With significant wealth, reduce the amount of excluded assets over time or otherwise increase the value of family property available to the spouse; and
- Do not include a waiver or partial waiver of spousal support in the agreement.
It will be important to document to clients that while family law agreements are strong risk mitigation tools to shield intergenerational wealth from family law claims from childrens’ estranged spouses, the risk cannot be completely erased.
Precedent:
iii) Discretionary Trusts
Estate practitioners often employ discretionary trusts as a vehicle to facilitate asset and business succession for the next generation. Such discretionary trusts are also a potential tool to protect against family law asset claims by a child’s estranged spouse, provided they are drafted defensively.
As estate practitioners are aware, a discretionary trust can be inter vivos or testamentary and provides that the trustee has absolute discretion and authority over the distribution of income and/or capital. Consequently, the beneficiary of a discretionary trust does not have an automatic right to any income or capital from the trust, unless specifically provided for in the trust deed.
Despite their benefits in terms of tax planning and consolidation of governance and control over assets while facilliating succession goals, assets in a discretionary trust may be exposed to family law claims against beneficiaries. Specifically, upon a beneficiary’s separation from their spouse, the beneficiary’s interest in a discretionary trust may be subject to the division under the FLA, particularly if the trust is not drafted or implemented defensively.
Section 84(3)(e) of the FLA provides that family property includes that part of trust property contributed by a spouse to a trust in which:
(a) the spouse is a beneficiary, and has a vested interest in that part of the trust property that is not subject to divestment, (b) the spouse has a power to transfer to himself or herself that part of the trust property, or (c) the spouse has a power to terminate the trust and, on termination, that part of the trust property reverts to the spouse.
Section 85(1)(f) of the FLA provides that the following is excluded from family property:
a spouse's beneficial interest in property held in a discretionary trust (i) to which the spouse did not contribute, and (ii) that is settled by a person other than the spouse;
The FLA includes in the definition of family property the amount by which the value of excluded trust property has increased since the parties’ relationship began, excepting out any property already received from a trust, in ss. 84(2)(g) and 84(2.1).
The recent case of Cottrell v. Cottrell, 2023 BCCA 471 involved a discretionary trust established by a parent of a spouse, where the parent retained control of the trust and there were multiple beneficiaries. The parents, Robert and Patricia Muster, contributed assets to two trusts, a family trust and a joint partner trust (the “Muster Trusts”). The Muster Trusts benefited Robert and Patricia Muster and their adult children, including their married daughter, Joanne Cottrell. Joanne Cottrell and her husband, Paul Cottrell, eventually separated, and Paul claimed that he was entitled to half of the increase in the value of Joanne’s interest in the Muster Trusts.
The court was asked to value the growth of the spouse’s “beneficial interest in” the property held in the discretionary trust during the relationship. Paul argued that the increase in value of Joanne’s beneficial interest should be assessed by valuing the increase in the assets held in the Muster Trusts and then dividing this increase by three. By doing so he represented Joanne’s interest in the Muster Trusts as equivalent to a fixed one-third direct interest in the assets held in the trust. This position was not accepted at trial.
The Court of Appeal held that valuing a beneficial interest in a discretionary trust is a fact-specific inquiry, based on both the language of the trust instrument and the various circumstances affecting that interest. Two values must be determined under s. 84(2)(g): the value of the spouse’s beneficial interest at the later of the time the relationship began or the property was acquired; and the present value of the spouse’s beneficial interest at the time of trial. The two values then need to be compared to determine if there has been growth in value of that beneficial interest.
A number of factors could potentially affect these starting and end values, including:
a) the circumstances of the owner-spouse, the trust, and the other beneficiaries;
b) the number and ages of the various beneficiaries;
c) the obligations of the trustee(s) under the terms of the trust;
d) the owner-spouse’s overall estate planning;
e) the trustee’s possible plans for the underlying assets of the trust;
f) the obligation of the trustee(s) to maintain an even hand when dealing with all beneficiaries;
g) the fair market value of the underlying assets of the trust; and
h) the expectations and legal rights of the other beneficiaries.
The Cottrell case involved a true discretionary trust with no established pattern of distributions providing predictability about the future and very little evidence of the value of the spouse’s beneficial interest at the time the trust was established versus at the time of trial. The court held that the uncertain nature of Joanne’s contingent beneficial interest in the the trust was such that it could not be said that there was an “increase in value” of this interest. In the absence of such a finding, there is no “increase in value of excluded property” to which a s. 84(2)(g) FLA claim could be asserted. Paul’s claim for a remedy in this regard was therefore dismissed.
The court was careful to point out that:
A different conclusion could well be reached in another case involving different trusts, trustees, beneficiaries, and spouses.
To summarize, Cottrell did not provide clear guidance on how a spouse’s interest in a discretionary trust would be valued. Rather, the BC Court of Appeal held that the husband did not have access to the wife’s interest in a discretionary trust as he was unable to assign a value to the increase in the wife’s interest. The court clarified that a different conclusion could be reached if the parties’ were somehow able to assign a value to the discretionary interest or its increase.
How should estate practitioners advise clients to reduce the chances that interests in a discretionary trust, or at least the increase in value of such interest, will be subject to division between spouses upon separation in certain circumstances?
Best Practices for Drafting Discretionary Trusts:
1. Include Mutiple Potential Beneficiaries
The discretionary trust should have multiple beneficiaries, as well as possibly charities to increase discretionary options of the trustee upon distribution. To prevent an argument that a charity is entitled to disclosure of the trust, the discretionary trust should include language about the kinds of charitable objects they may wish to benefit rather than a specific charity.
2. Flexible Distribution and Amendment Provisions
The discretionary trust may provide that the trustee can fully distribute the trust assets prior to the time of division of the trust, in the trustee’s absolute discretion. This would make clear that the benefits to a beneficiary are not certain, being contingent on not only the trustee exercising its discretion in favour of the beneficiary, but also on there being trust assets remaining at the time of division. The discretionary trust could have a distribution structure that permits transfers to alternate/related trusts. This may provide an added layer of protection against a finding that the beneficiary is guaranteed to benefit from the trust. The discretionary trust may include a specific provision that allows for amendments to the terms of the trust. This again provides extra support for an argument that the beneficiary is not guaranteed to benefit from the trust.
3. Ensure that Beneficiaries Cannot Contribute to or Dispose of Trust Property
The discretionary trust should prohibit any contribution of assets by a beneficiary of the trust. Additionally, the trust should explicitly prohibit the beneficiary from participating in any transactions to settle property onto the trust in order to limit arguments that the beneficiary has “contributed” or “disposed of” property to the trust for the purposes of ss. 84(3) and 84(2)(f) of the FLA. Specifically, the discretionary trust should prohibit the beneficiary from directly transferring assets (cash, shares, real estate, etc.) to the trust; participating in any corporate restructuring, such as to surrender or exchange shares, as part of settlement of the trust; and/or participating in any corporate decision making that may be involved in transferring assets/property to the trust.
4. Consider a Disqualification Provision upon Separation
A discretionary trust could provide that if any person with an interest in the trust becomes separated from their spouse, then that person will automatically be disqualified on the date that is one day prior to the person’s separation from their spouse. It is preferable to impose disqualification rather than require such person renounce or resign, since disqualification lessens the chance that a separating spouse is seen as deliberately trying to divest themselves of potential family property. Note that the tax consequences of the disqualification would need to be considered.
5. Encourage/Require Beneficiaries to Enter Into Family Law Agreements
Encourage all beneficiaries enter into common law/prenuptial family law agreements prior to living common law or becoming legally married. As an additional protection, a discretionary trust may include, as a condition precedent to a person becoming a beneficiary, a requirement that the person enter into a family law agreement and provide proof satisfactory to the initial trustee that such an agreement has been executed.
Precedent:
2. The Future Casserole Brigade
A. The Issue
It’s not uncommon for an estate planning lawyer to hear a concern from one spouse that, if they die first, the surviving spouse will re-marry and potentially leave jointly built assets to a new spouse instead of to their mutual children.
B. The Potential Solutions
i) Inter Vivos Joint Partner Trust
Where the spouses have both contributed to their assets and/or have been in a long marriage, one potential solution is to settle a Joint Partner Trust (”JPT”). If the settlor is at least 65, they can settle a JPT to ensure that the assets of the spouses are available for the survivor for the remainder of their lifetime and then pass to their children on the last to die.
To put checks and balances in place against asset claims by a future spouse, the following JPT drafting provisions should be considered:
- The trust document could include an express term that after the death or mental incapacity of the first to die or first to lose capacity of the spouses, no changes can be made to the ultimate distribution scheme that the spouses have agreed upon. This can effectively lock‐in the intended distribution at least in respect of the assets that remain in the trust on the death of the second to die; and
- The surviving spouse and an independent trustee such as trusted friend, advisor or trust company could act together, or the survivor together with a child of the first to die. By appointing a co‐trustee, the spouses diminish the likelihood that the survivor will substantially deplete the trust capital or otherwise act to defeat their joint estate planning intentions, subject to the terms of the trust deed.
Precedent:
ii) Mutual Wills Agreement
Clients may be adverse to Joint Partner Trusts for the following reasons:
- They are expensive to set up and involve onging regulatory requirements, including filing annual T3 tax returns;
- The wealth may not be sufficient to warrant expensive estate planning or may be largely held in the form of real estate and/or registered funds, resulting in a JPT being undesirable and/or unworkable as a solution; and/or
- The clients are not yet 65.
While trusts are the most reliable method of ensuring desired capital succession when a surviving spouse dies, people who want to avoid the restrictions of a trust can consider mutual wills. Mutual wills provide a legal basis to ensure a specific estate distribution is maintained in the future. Mutual wills can be a useful tool for spouses who are comfortable with waiving their right to make changes to their wills in the future, except as agreed upon.
The doctrine of mutual wills applies where two or more persons make wills containing similar terms pursuant to an agreement that the wills should be made and not revoked. The effect of the doctrine is that when one party dies leaving a will in accordance with the agreement, the other party is bound by the agreement and a trust arises in favour of third party beneficiaries of the agreement. Note that spouses executing mirror wills at the same time and on similar terms is not on its own sufficient to establish a mutual wills agreement.
The BCCA decision of Brynelsen Estate v. Verdeck, 2002 BCCA 187 summarized the requirements for mutual wills:
“(a) there must be an agreement between the individuals who made the wills, which amounts to a contract at law; (b) the agreement must be proven by clear and satisfactory evidence; and (c) it must include an agreement not to revoke wills.”
In Gefen v. Gaertner, 2019 ONSC 6015, Justice Kimmel explained:
A mutual will agreement is more than a mirror will — it is an agreement that the wills not be changed and is a constraint on testamentary freedom. The testamentary intentions of the will-makers expressed in their mirror wills is not enough to establish that they had agreed that the survivor would not be able to vary such dispositions in the future…
An MWA is a binding contract between spouses not to revoke (or change or replace) their wills. More precisely, it is an agreement to dispose of their property in a particular way that equity enforces through the mechanism of a constructive trust after the first of the spouses has died, if the survivor does not abide by their agreement.
If a surviving spouse breaches the agreement, courts will generally impose what’s known as a constructive trust. Such a trust would pass property that should have passed in accordance with the spouses’ agreement to the spouse’s intended beneficiaries. By doing so, the court will ensure that the surviving spouse’s promise is enforced and that he or she is not allowed to deviate or withdraw from the agreement after the first spouse’s death. Specifically, the court will ensure the predeceased spouse’s intentions are carried out to benefit their intended beneficiaries.
Note that many practitioners have reservations about mutual wills’ effectiveness and reliability compared to trusts, given the relative dearth of case law dealing with them and a potential difficulty of enforcement. A further concern with the use of mutual wills is they create inflexibility in the future if there are changed circumstances that weren’t anticipated.
Best practices for drafting Mutual Wills Agreements:
- Identify the property to which it applies. Identify if there are any excluded assets of either of the parties that should not be subject to the agreement, either at the time of drafting, or in the future. Identify if property acquired by either or both of the parties after the date of the agreement is intended to be governed by the agreement;
- If it is intended that the surviving spouse should or should not be subject to limitations on his use of the assets after the death of the first to die, that should be clearly articulated;
- The agreement should address if or how it can be amended; and
- Each of the parties to the agreement should be encouraged to obtain independent legal advice.
Precedent:
3. The Blended Family
A. The Issue
Blended families, those where at least one of a couple’s children is not a mutual biological or legally adopted child, are at higher risk of estate disputes and accordingly require careful estate planning. How best to provide for a surviving spouse must be balanced against wishes to ensure that capital of the estate of the first spouse to die will transfer to their children from a prior relationship. These competing interests regularly result in wills variation claims by spouses and/or children.
WESA provides in section 60 as follows:
Maintenance from estate
60 Despite any law or enactment to the contrary, if a will-maker dies leaving a will that does not, in the court's opinion, make adequate provision for the proper maintenance and support of the will-maker's spouse or children, the court may, in a proceeding by or on behalf of the spouse or children, order that the provision that it thinks adequate, just and equitable in the circumstances be made out of the will-maker's estate for the spouse or children.
The effect is that if a will‐maker leaves all or a significant portion of their estate to their second (or third or fourth!) spouse, their children from an earlier relationship have legal standing to challenge the disposition provided in their will. Similarly, if a will‐maker leaves all of their estate to their children, their surviving spouse has standing to challenge their will. The Courts consider will‐makers to have a moral obligation to provide for spouses and children, even adult, independent children, and failure to provide adequately for any one of them may result in disputes and uncertainty.
Spouses that have separated prior to the death of a spouse lose their standing to apply to vary the will and must proceed under the FLA. “Child” means the biological or adopted child of the will-maker and does not include step-children, unless they were legally adopted.
Assessing what amounts to “adequate” provision for spouse and children will necessitate a fact specific analysis. The leading test in BC is set out in the Supreme Court of Canada’s decision in Tataryn v. Tataryn Estate (“Tataryn”). Despite being decided under the former Wills Variation Act (which was repealed by WESA), the case continues to be applied to variation claims in BC. The court in Tataryn referred to the prior case of Walker v. McDermott (”Walker”) which held that the test for determining what is adequate, just and equitable is that of the “judicious father of a family seeking to discharge both his marital and his parental duty,” and should be determined according to contemporary standards, which will change from time to time. While the test in Walker was confirmed in Tataryn, in Tataryn the Court also stated that the test requires consideration of the legal and moral obligations owed by the deceased to the spouse or child.
Legal obligations to a spouse are framed by what the surviving spouse would have been entitled to had there been a separation immediately prior to death. This brings into the analysis the property and debt division provisions of the FLA, as well as the spousal support provisions. As a parent will not typically have a legal obligation to an adult, self-supporting child, where there are competing interests between a spouse and adult children in a wills variation action, the court must first address the legal obligation to the surviving spouse before addressing competing moral obligations.
Moral obligations were not defined by the Court in Tataryn but appear to include the factors that guided the courts’ discretion in the cases prior to the Tataryn decision. Courts must assess all competing claims to the estate having regard to the fact that not all claimants have claims of equal moral strength and that legal obligations take precedence over moral obligations. Courts may consider the reasons of the will-maker for making a limited gift in the will or disinheriting the spouse or child, provided the reasons are accurate, rational, connected to the disinheritance and not against public policy.
Key considerations of a court will include the following:
- Did the testator make any promises to the applicant?
- What was the nature of the relationship between the testator and the applicant?
- What kind of support did the testator give the applicant throughout their relationship?
- How large is the estate?
- What are the needs of the applicant?
- Did the spouse or child engage in any misconduct?
- How long was the marriage?
- Is the child an independent adult?
B. The Potential Solutions
BC courts have held that a person may arrange their affairs to reduce the possibility of a wills variation claim. There are a variety of tools available to clients to reduce the likelihood of a wills variation act claim or at least reduce the chances it will be successful if it occurs.
i) Family Law Agreements
Where parties have children from prior relationships and/or are married or cohabiting in mid or later life, marriage and cohabitation agreements are effective tools to set out property division and support terms in the event of a separation. These agreements also often include provisions regarding estate obligations. Specifically, spouses may elect in a family law agreement to contract out of their entitlement to bring a wills variation claim. However, this waiver does not prevent a surviving spouse from commencing a claim to vary the will of the deceased spouse.
While an express waiver of a right to vary a will speaks to the expectations of the parties when they entered into the agreement, it represents only one of the factors a court will consider. The existence and content of an agreement, and its impact on the claims otherwise available under the FLA, will be relevant to the analysis of a deceased spouse’s legal and moral duty to the surviving spouse.
ii) Remove Assets from the Estate
Wills variation claims are only applicable to the assets that form part of the deceased’s estate. Assets that the spouse and children received outside the estate will be relevant to claims to vary a will. However, a disappointed beneficiary receives no benefit from applying to vary a will where there are no assets in the estate, unless an asset recovery claim is successful in bringing assets back into the estate. For example, an applicant may be able to argue certain assets should have been included as part of the estate by claiming that the recipients of an inter vivos transfer hold the asset on a resulting trust for the estate.
Will-makers are therefore able to distribute assets outside of an estate through:
- gifting property during their lifetime;
- transferring assets into joint tenancy;
- making insurance and benefit plan designations; and
- transferring assets into inter vivos trusts such as alter ego and joint spousal trusts.
Note in the blended family context, where there is an increased risk of wills variation, the importance of properly recording the intentions of a transferor at the time they transferred an asset into joint tenancy cannot be overstated.
Type of Joint Tenancy | Intention | Documents Required |
Gift
*consider tax consequences for the transferor | The transferor transfers an
interest in an asset to the transferee, with the intention that the property is immediately legally and beneficially owned by the transferor and transferee jointly and in proportionate shares, and that the property will pass to the transferee both legally and beneficially by right of survivorship. | Deed of Gift, providing that the transfer is immediate, and is made as to the transfer of legal and beneficial ownership, to the transferee absolutely with the right of survivorship. |
Trust | The transferor transfers their
interest in an asset to the transferee with the intention that legal title to the asset will pass to the transferee by right of survivorship, but that the surviving joint tenant will hold the property on behalf of the transferor’s estate to be distributed in accordance with the transferor’s will. | Bare Trust, confirming that, notwithstanding that the transferee
owns legal title to the property, effective the date of the transfer, the transferor is the sole beneficial owner of the property during her lifetime, and after her death the transferee will continue to hold the asset as legal owner on account of the estate of the deceased transferor. |
Pecore (2007 SCC 17) Gift of Right of Survivorship | The transferor transfers property into joint tenancy with the transferee with the
intention that the transferor will be the sole beneficial owner of the property during his lifetime, but on their death, the transferee will take the asset, legally and beneficially, by right of survivorship. | 1. A deed of gift evidencing that the transferor has gifted only the right of
survivorship in the property at the time of transfer.
2. A bare trust agreement confirming that during the lifetime of the transferor, the transferee has no beneficial interest in
the property. |
Sawdon (2014 ONCA 101) Gift of Right of Survivorship with Trust Terms | The transferor transfers property to the transferee with the intention that the
transferee will have no beneficial interest in
the property during the lifetime of the transferor, and following the death of the
transferor, the transferee will legally hold the property by right of survivorship, but will
distribute that property in accordance with trust terms imposed on the property for the beneficiaries designated by the transferor. | 1. A deed of gift witnessing that the transferor has transferred only the right of survivorship in the property at the time of transfer.
2. A bare trust agreement confirming that during the lifetime of the transferor, the transferee has no beneficial interest in the property; and
confirming that the transferee agrees to hold the property in trust in accordance with the terms provided by the transferor. |
The tax implications of beneficiary designations and the new regulatory reporting and T3 tax return requirements of bare trusts and jointly held assets will also need to be carefully considered, but are beyond the scope of this paper.
iii) Inter Vivos Alter Ego/Joint Partner Trusts
Alter ego trusts (“AETs”) or joint partner trusts (“JPTs”) are useful tools for blended families. An AET or JPT may be an appropriate tool where the spouses have kept their assets separate and one spouse wants to provide ultimately for the children of their first marriage, but the well‐being of their spouse is also a priority. In that circumstance, the settlor might settle a JPT, provide generously for their spouse for their remaining lifetime if they survive them, and on their death the balance of the trust property can be distributed to their children.
Estate planners should ask clients to consider how the trust will operate in practice following the death of the first to die. Should the surviving spouse have unfettered access to the capital, or would a minimum monthly stipend, adjusted for inflation, be sufficient to meet their needs? Granting the survivor sufficient freedom to live their life as they choose after the death of a spouse, while also ensuring trust assets and property are preserved for children from an earlier marriage is a balancing act.
If tax deferral until the death of the surviving spouse is not important, such settlor might prefer to settle an AET rather than a JPT so that the trust property can be divided between the spouse and children immediately following the settlor’s death (a JPT will require the assets to remain in the trust for the sole benefit of the surviving spouse until the spouse’s death).
In some cases, it may be appropriate for the client to settle both an AET and JPT. The AET can hold assets that are to be divided amongst the children following the client’s death, while the JPT can hold assets that are to be held for the benefit of the spouse for their remaining lifetime if they survive, and then divided amongst the children after the spouse’s death. Though such a structure will increase the planning costs and administration, it will clearly delineate assets and beneficiaries.
In many instances, the trust can be drafted in a way that protects the children and
also provides sufficient flexibility to allow the survivor to live out their days in comfort and in a place of their choosing.
iv) Spousal Trust in a Will
Consideration should also be given to whether it is appropriate to include a spouse trust provision in a client’s will. The spouse trust can be used in a typical will plan or in a multiple wills plan.
Establishing a spouse trust allows the client to leave all or a portion of their assets in a trust for their spouse’s benefit for the remainder of their lifetime without triggering the capital gains tax liability in respect of those assets on their date of death. In a blended family context, this means the client has a tool to preserve the capital of their estate for the benefit of the children from their first marriage and also provide for their surviving spouse for their lifetime, hopefully mitigating the likelihood that a court would vary their will by ensuring their spouse’s needs are met after their death.
The will should specify the assets that will fund the spouse trust, if it is not simply to receive the residue of the estate. To qualify as a spouse trust (and therefore be entitled to the tax deferral) pursuant to s. 70(6) of the ITA:
- The spouse must be entitled to all of the income from the spouse trust during their lifetime (calculated for trust law purposes);
- No person other than the spouse may, during the spouse’s lifetime, receive or otherwise obtain the use of any of the capital of the trust;
- The trust must be created under a will; and
- The assets must vest indefeasibly in the spouse trust within 36 months following the death.
The client can direct the extent to which their trustee can encroach on capital or if the spouse should receive income only. They could grant total discretionary power to the trustee to encroach on capital for the benefit of his spouse. Alternatively, to balance their goals of securing the capital for the children of their first marriage with their obligation or wish to provide for their surviving spouse, the client could direct that a specified amount be paid from capital if the income arising from the fund falls below a set dollar‐figure, which amount could be adjusted for inflation. The client could also direct that extraordinary medical expenses, the costs associated with providing in‐home health care, or similar expenses, be paid from capital on an as‐needed basis.
The spouse trust can specify that the principal residence be included as an asset of the spouse trust. The client should consider whether the surviving spouse will be permitted to direct the trustee to rent the residence out to third parties, sell the property and replace it with a different property of the spouse’s choosing (if, for example, their housing needs change as they age), and if they may access the capital from the sale of the property to provide for extraordinary or medical expenses as result of illness or aging.
Regarding who pays for what expenses of the principal residence, subject to direction otherwise in the Will or life estate document, the common law provides default rules regarding the responsibilities of the life tenant and remainderman. Some of these rules are set out in Re Goodfriend Estate, [2003] OJ No 4291, 4 ETR (3d) 10. The responsibilities include:
Life Tenant | Remainderman |
“ordinary outgoings of a recurring nature”
heat and hydro,
annual taxes
interest on mortgage debt (but not the principal)
damage or recurring maintenance | “preservation of the property”
capital upkeep/repairs (such as the
repair of a roof),
legal proceedings (unless for lifetenant’s sole benefit),
trustee’s costs and expenses,
appointment of new trustees
insurance
principal of mortgage |
The choice of trustee of the spouse trust is a very important consideration in blended families. Having the children of the first marriage act as trustees of the spouse trust could lead to conflict. They may not get along well with their step‐parent and may struggle to fulfill their fiduciary obligation to provide adequately for the second spouse. While the children of the first marriage may be appropriate trustees in some contexts, it is important to keep in mind the inherent conflict of interest that arises where the trustees are both the trustees and the remainderman beneficiaries of the trust.
The client could appoint the second spouse the trustee of their own spouse trust, on their own or as one of multiple trustees of the trust. The spouse acting with another trustee will ensure the capital is not unduly eroded by the spouse but yet allow the spouse a measure of control over the capital that is being held for their benefit. In the event of potential conflicts or no individual party being an appropriate trustee, the client could consider appointing professional trust company to act as trustee of the spouse trust.
Precedent:
v) Mutual Wills Agreement
As discussed above regarding the casserole brigade concerns, while trusts are the most reliable method of ensuring desired capital succession while mitigating risks of estate litigation, blended family clients who wish to avoid the expense and administrative complexity of trusts can consider mutual wills as an alternative solution to acheive their estate planning goals.
4. The Unhappy Later Life Spouse
A. The Issue
Sometimes later life spouses are unhappy in their marriages and are considering a “grey divorce.” On a related note, the unhappiness may primarily lie in a lack of trust regarding finances and a dissatisfaction regarding the other spouse’s estate planning. Advising these clients on how best to proceed will require an understanding of family law and estate law considerations and how they will intersect in that particular client’s circumstances.
B. The Potential Solutions
i) Remain in the Common Law/Legal Marriage
Where a client is considering separation later in life, it is prudent to consider if they will receive sufficient property and support from their spouse upon separation. If their spouse has greater assets and is elderly or ill, a client with limited means may choose not to separate in order to receive more property from their spouse through the will or other estate planning measures.
Note that under WESA, excluded property may be included in the will-maker’s estate. A spouse who would not otherwise be entitled to excluded property on separation may be gifted the property in their spouse’s will. Even if a will does not gift any excluded property to a spouse, the lesser means spouse may be able to increase their property entitlement through a wills variation claim by asserting the will does not adequately provide for their support and maintenance and relying on the will-maker’s legal and moral obligation to them.
Similarly, the validity of a will may be challenged in certain circumstances, for example on the basis that the will-maker lacked testamentary capacity. Where a will is held to be invalid and there is no previous will, the rules regarding intestate division under WESA will govern the distribution of the estate. The intestacy provisions of WESA mandate that a significant share of the estate shall transfer to the surviving spouse, even when there is a child or children of the deceased.
ii) Register a Land Spouse Protection Act Charge
Unhappy spouses who are not on title to the matrimonial home and are concerned that there will be an inadequate provision for them under their spouses’ will, have an important strategic asset protection tool at their disposal: the Land (Spouse Protection) Act, RSBC 1996, c. 246 (the “LSPA”).
The LSPA allows a person to register a charge on their spouse’s property to prevent its disposition without their consent. The LSPA allows married and unmarried spouses to preserve an interest in a “homestead,” without starting court proceedings.
Generally, the LSPA prevents an owner‐spouse (a spouse who owns the matrimonial home) from disposing of property that is the residence of the spouses, or was the residence of the spouses within the period of one year immediately preceding the date of the making of the application for entry on title by the non‐owning spouse. Section 3 provides that once an entry has been made on the title of a homestead, disposition of the homestead is void for all purposes without the written consent of the spouse on whose behalf the entry is made.
Additionally, the LSPA also has the effect of creating a life estate in the “homestead”, which arises on the death of the owner spouse. Section 4 of the LSPA provides as follows:
Application of Wills, Estates and Succession Act
4 (1)If an entry has been made on the title under section 2, section 162 (1) of the Wills, Estates and Succession Act applies to the devolution of the homestead.
(2)Despite any testamentary disposition or rule of law and subject to the liability of the land comprising the homestead for foreclosure or the payment of debts, a personal representative holds the homestead in trust for an estate for the life of the surviving spouse.
Note the estate will be responsible for the usual capital expenses incumbent in a life
estate, which are likely an unanticipated expense not accounted for in the will.
Section 8 provides, inter alia, that an owner spouse may apply by petition and “on being satisfied that it is fair and reasonable under the circumstances to do so, the Supreme Court may dispense with the consent of a spouse, on whose behalf an entry is made, to a proposed disposition if …the spouse on whose behalf the entry is made unreasonably withholds consent.”
When acting for the client who owns the home, possible strategies to prevent a LSPA charge being registered are entering into a family law agreement providing that it will not be registered or holding title to the home jointly with an adult child.
There is relatively little case law on the application of this legislation in BC.
iii) Initiate a Separation
If a client is aware that their spouse has engaged in estate planning and believes the will or other documents (for example alter ego or joint spousal trusts) do not provide sufficiently for them, the client may benefit from triggering their interest in the will-maker’s assets by separating prior to the spouse’s death.
For example, where the greater asset spouse has limited the value of assets that will flow through their estate through beneficiary designations, joint ownership with others, or transfers to trusts, there will be few or no assets to recover under a wills variation claim. There may be no factual grounds for an asset recovery claim or to challenge to the validity of the will or inter vivos transfers. By separating, the spouse with fewer assets will trigger their entitlement to family property and have access to potential claims for an unequal division of family property or even to divide excluded property by pleading significant unfairness. If the greater asset spouse then dies, the family law property claim can continue against that deceased ex-spouse’s estate.
IV. Conclusion
Competent estate practitioners will have an understanding of how family law intersects with the estate issues facing their clients. While the intersection of these areas of law can be complex, this knowledge will enable estate planners to create agreements and testamentary documents that can effectively address common client concerns. Particularly for clients in later life and with blended families, a clear understanding of how these areas of law interface will better equip us to help clients avoid the stress, costs and delays of disputes in the event of their death, disability and/or divorce.
Nicole Garton is president and co-founder of Heritage Trust.
Recognized by Best Lawyers in Canada for trusts and estates and family law, she previously chaired the Canadian Bar Association Wills and Trusts Subsection (Vancouver).
Contact Nicole by email or phone at (778) 742-5005 x216.
Heritage Trust is a leading non-deposit taking financial institution, regulated by the BC Financial Services Authority (BCFSA), a government agency of the Province of British Columbia. Heritage Trust offers caring and professional executor, trustee, power of attorney, committee, escrow and family office services to BC resident clients.
We welcome you to contact us.