This paper identifies the building blocks of an estate plan that are necessary to ensure a client’s financial and health care wishes during life, as well as the disposition of his or her assets on death, are accomplished in a way that is beneficial not only to the client, but also to those individuals that are to benefit from the plan. Issues to be considered by a good plan include tax, probate avoidance, privacy, dispute minimization and efficiency. Important to understanding a good plan is both appreciating the planning options available and also the consequences of having no plan.
1. What happens without a plan
Many individuals delay or entirely avoid creating an estate plan, sometimes explaining they have not decided how they wish their estates to be managed or disposed of or perhaps feeling they have lingering questions that delay the decision-making. However, it is important to understand that by not creating a plan of his or her own choosing, he or she has made a choice. That person has chosen the default laws that govern estates as their “plan”. The first portion of this paper focuses on what this default “plan” is on death.
1.1. On death
In general terms, when an individual dies his or her estate will be distributed, either pursuant to a contractual obligation, a testamentary instrument prepared during the individual’s lifetime such as a Will, or, if there is no direction otherwise provided, then the relevant legislation. As illustrated below, expensive litigation, unnecessary taxes and unintended beneficiaries often result from an estate plan that fails to take into consideration the individual’s ultimate wishes, the traits of the various beneficiaries, and the attributes of the assets passing through the estate.
1.1.1. Without a Will
If an individual dies without a Will, the deceased individual is considered to have died “intestate” and the entirety of his or her estate an “intestate estate”. Further, if, despite having a Will (or other controlling instrument), all of the deceased’s assets are not properly disposed of, a portion of the deceased’s estate will form a partial “intestate estate”. Each province in Canada has intestacy rules that define the manner in which an intestate estate is to be distributed. Simply put, this means that the provincial government, and not the deceased, decides who receives the estate and in what proportions.
In British Columbia, the intestacy rules are set out in Part 3, Division 1, of the Wills, Estates and Succession Act, S.B.C. 2009, c.13 (“WESA”). In summary terms, these rules provide as follows:
- If the deceased had a surviving spouse and no surviving descendants, the intestate estate passes to the spouse.
- If the deceased had a surviving spouse and surviving descendants, then what passes depends on whether such descendants are also the surviving spouse’s descendants. If so, then the surviving spouse gets the first $300,000 value of the estate. If not, the surviving spouse gets the first $150,000 value of the estate. In both cases, the surviving spouse also receives 50% of the balance of the intestate estate and the remaining 50% is divided among the descendants.
- The surviving spouse also has the right to the household furnishings as well as the right to acquire the family home from the deceased’s estate as part of the surviving spouse’s share.
- Note that it is possible for a deceased to have more than one spouse and, if this occurs, the surviving spouses share equally in the spousal portion unless the spouses or a court decides differently.
- If the deceased leaves no spouse surviving, then the intestate estate is divided among the surviving descendants, if any. The first generation alive receives the descendants’ share with representation should a member of the class have died leaving descendants.
- If the deceased leaves no spouse or descendants surviving, then the intestate estate is divided among the surviving parents of the deceased or if no parents are surviving among the siblings of the deceased.
- There are further rules if a deceased leaves no surviving spouse, descendants, parents or siblings.
Note that a minor descendant would receive his or her share upon the age of majority, which is 19 in British Columbia. This may not be an appropriate age for a descendant to receive an inheritance.
As a Will speaks from death, the Executor appointed under the terms of the Will has the authority to act on death regardless of whether a Grant of Probate is ultimately sought. However, without a Will, on death there is no one authorized at law to take actions with respect to the estate and, therefore, the estate is frozen until an individual applies to be appointed as administrator and Letters of Administration are granted. This can create a delay of several months, at least, in which decisions cannot be made and can be both frustrating and potentially damaging to an estate.
Intestacy also can result in unintended tax consequences, as those assets passing on an individual’s death to anyone other than the individual’s spouse will be subject to a deemed disposition and the resulting gains subject to tax. This would exclude the gains accrued in a principal residence to the extent shielded by the principal residence exemption and any gains shielded by a capital gains exemption. If the intent was to provide solely for the surviving spouse, and as such benefit from the deferral of capital gains tax, an intestate estate that involves a spouse and descendants will not entirely achieve this deferral and taxes will be owing on death.
1.1.2. Without further consideration other than the Will
Sometimes even a Will is not the most effective estate planning tool to accomplish an individual’s goals for the distribution of an estate on death. Having only a Will can lead to unnecessary probate fees, exposure of the assets of the estate to a variation claim, and loss of privacy on the distribution of the estate, to name just a few examples.
To illustrate, if it is necessary for a personal representative to obtain a grant of probate (or other forms of representation grants where there is no Will or no acting executor), probate filing fees will be payable. Where a deceased was resident or domiciled in British Columbia, the probate fees payable will be in respect of all the assets of the deceased situated in British Columbia, and all intangible assets, wheresoever situate, that pass to the personal representative. Where the deceased was not resident nor domiciled in British Columbia, probate fees apply only to those real and tangible assets situated in British Columbia. The general test of whether an asset is situate in British Columbia is whether the asset can be dealt with effectively in British Columbia. The basic fee for a grant of probate is $200. Additional probate fees are payable at the rate of $6 for each $1,000 or part of $1,000 of the value of an estate that has a value of more than $25,000 but not more than $50,000 and $14 for each $1,000 or part of $1,000 of the value of an estate that has a value of more than $50,000.
Under the WESA and the B.C. Rules of Court, the personal representative (whether executor or administrator on intestacy) must disclose to the Court by way of affidavit the assets (and certain liabilities) of the deceased, irrespective of their nature, location or value, which pass to the applicant as the personal representative on the deceased’s death. Notably, all such assets must be disclosed regardless of whether each individual asset requires a grant of representation. In other words, if one asset in the estate requires a grant of representation in order to be dealt with then all assets passing to the personal representative must be disclosed (and probate fees paid thereon if applicable). Under the WESA there are disclosure limits where the deceased was not domiciled or resident in B.C., the property is situated outside B.C. and the property will be administered by a foreign personal representative. The documents submitted to the Court in support of a grant of representation are public documents, searchable and discoverable by anyone.
If a grant of representation is being sought in respect of a Will, the terms of such Will and the assets under its administration could also be subject to claims under the variation of wills provisions of WESA (the successor legislation to the Wills Variation Act), which in general terms provides that a child or spouse (including a common law spouse) of the deceased may commence an action if he or she feels that the deceased has not made adequate provision under the Will for such spouse or child’s proper maintenance. Such claims can result in substantial litigation-associated fees and costs that diminish the assets of the estate and create discord and resentment among the parties. Such claims can be avoided where planning tools other than a Will are correctly used as the court’s authority to vary extends only to assets passing under the Will.
We discuss in further detail below several of the further estate planning tools that should be considered, dependant on an individual’s circumstances, and how these tools can assist and protect an individual’s estate plan.
2. The basic estate plan for death
It is generally considered that the bedrock to an individual’s estate plan is the Will, and rightfully so as it is a rare estate plan that would not benefit from the preparation of a Will. However, a Will is often used as a back up to other planning in the event that circumstances, or unpredictable clients, cause assets to fall back into the estate that would otherwise be captured by an inter vivos trust or other planning tools. Even if a Will is the centerpiece of a plan, it should be constructed with care and consideration to the individual’s personal circumstances, the varied traits of the beneficiaries, and the assets that are intended to be subject to its terms.
2.1. The Will
When preparing a Will, the individual should first determine what the individual owns and may dispose of on death. Assets owned outright are easily identified whereas other types of beneficial enjoyment can be more complex. To illustrate, an individual may have a beneficial interest in a trust but dependent on the terms of the trust, the individual may not have the ability to direct how this beneficial interest is disposed of on his or her death. Even if the individual has a beneficial interest that is subject to his or her direction, this does not mean that the ability to exercise this direction is or should be the terms of the Will. For example, an individual may have the ability to designate one or more beneficiaries of an insurance policy, registered retirement savings plan, registered retirement income fund, tax free savings account, pension plan or similar plan benefits, but this may be better accomplished, or perhaps must only be accomplished, pursuant to the provider’s beneficiary designation form. Similarly, when an individual holds property as tenants in common with another individual, his or her share of the property will form part of the estate to be dealt pursuant to the provisions of the will. However, when an individual holds assets in joint tenancy with one or more individuals, the property may pass to the surviving joint tenant or joint tenants by right of survivorship on the death of the first joint tenant to die and will not form part of the estate. Joint property and beneficiary designations are discussed in further detail below.
While many individuals will comment that all they require is a “standard” or “simple” Will, in reality there is no such thing. Every client will bring unique personal and financial circumstances that will require individualized attention and consideration. With that being said, what follows is a list of general clauses that at a minimum should be considered and included in some way in the Will.
- Identification: The will-maker should be clearly identified with his or her legal name, along with any other names that will-maker is known by or in which his or her property is registered. In cases of doubt, the individual’s citizenship and residence or domicile is also listed.
- Revocation: Clarification should be made that the Will is revoking all previous wills and codicils, with consideration as to whether the individual has more than one Will not all of which should be revoked. For example, an individual may have a Will governing assets in a foreign jurisdiction that is intended to remain in place.
- Executors and Trustees: It should be made clear who is being appointed to administer the terms of the Will, including any trusts to be created by its terms. It is generally recommended that there be at least one alternate listed to the original appointment. If more than two persons will act, consideration should be given to whether the persons are to act by majority or in what other manner, and also that if one is unable to act whether the remaining persons can act alone.
- Personal Articles: Generally personal articles are the first items distributed out of an estate, as although often not of much value monetarily, they can have significant sentimental value attached to them. The will-maker may wish to provide for specific gifts to certain individuals, grant the executor the ability to exercise his or her discretion for distributing the articles among a class of beneficiaries, or even grant the beneficiaries with the ability to divide the articles among themselves. With the latter provision, it is important to add a clause specifying what should occur if the beneficiaries are unable to agree to a division. Caution should be used when memoranda outside the Will are referenced as only those existing prior to the execution of the Will and specifically referenced will be legally binding without a court order.
- Charitable and Other Special Bequests: Individuals may wish to leave cash legacies or bequests of specific property to certain individuals or charities and care should be taken in each case that the gift itself, either as to amount or item, and the beneficiaries who are to receive the gift are clearly identified.
- Gifts of Residue: The residue clause sets forth the disposition of the estate remaining after the gifts and legacies have been satisfied, as well as the payment of all taxes, debts, and administrative expenses. Often this is to the spouse, children, other family members or friends, or charities. Consideration should be given as to whether the distributions from the estate are to be outright, and therefore ultimately in the control of the recipients, or subject to trust terms and therefore under the control and direction of a trustee for the benefit of the beneficiaries. Sufficient contingencies should be contemplated as to what should occur if an intended beneficiary does not survive.
- Survivorship: The will-maker should either specify a survivorship requirement of a certain period (the standard being 30 days) to be applied generally or take into consideration s. 10 of WESA which in general terms provides that a person who does not survive a deceased person by five days, or a longer period provided in an instrument, is conclusively deemed to have died before the deceased person for all purposes affecting the estate of the deceased person.
- Administrative Powers: Consideration should be made as to what administrative powers the executor will need to effectively administer the estate, including but not limited to powers relating to the sale and retention of property, the conversion of assets or the distribution of assets in kind, the investment of assets, the retention of agents, the ability to deal with specific property such as real estate and business property, the ability to borrow from and lend property of the estate or trust, the payment and satisfaction of debts and the ability of the executors and trustees to transact with the estate or trust.
The above is only a brief sampling of some of the key terms to consider in Will planning. Other important elements include the appointment of guardians, funeral wishes, tax planning considerations for Wills and a variety of other considerations.
2.2. Beneficiary designations
For certain assets, such as Registered Retirement Income Funds (“RRIFs”), Registered Retirement Savings Plans (“RRSPs”), Tax Free Savings Accounts (“TFSAs”), life insurance policies and pension plans, there is the option of designating one or more beneficiaries other than an individual’s estate to receive the assets. Sometimes there is also the ability for an individual to appoint one or more contingent beneficiaries. When beneficiary designations are implemented, the benefits or proceeds are not subject to the terms of the individual’s Will but instead subject to the terms of the designation. This insulates them from probate fees, probate and variation claims.
By contrast, Registered Education Savings Plans (“RESPs”) belong to the individual, who is referred to as the subscriber. On the death of the subscriber (other than a joint subscriber) the RESP forms part of his or her estate and are subject to the terms of the subscriber’s Will. As such, it is important when preparing a client’s estate plan to know whether or not the client is the subscriber or joint subscriber of an RESP and if so to determine the client’s intentions for the RESP on his or death so that those intentions in the plan or Will, if permitted to be provided for in the Will.
2.3. Jointly held property
Property held in the names of two or more people may be held in joint tenancy or tenancy in common. Tenancy in common is a form of ownership where each tenant in common owns an undivided interest in a portion of the property and the interests of the owners in the property are not necessarily equal. In contrast, joint tenancy is a type of ownership where two or more individuals each have an undivided interest in the whole property. Each joint tenant has an undivided and identical interest in the property.
On death, the share of a deceased tenant in common is distributed through the terms of the deceased’s Will. When a joint tenant dies, the surviving joint tenant(s) automatically (by right of survivorship) acquires the deceased’s interest in the asset. Since the interest of the deceased joint tenant is extinguished on death, that interest does not form part of the deceased’s estate.
Holding assets as joint tenants is a common estate planning tool used by many couples and also often between parents and adult children. However, joint tenancy is perhaps the most misunderstood and misused method of property ownership. This is because a joint tenancy can be a true joint tenancy at law and at equity, only joint as to legal title with underlying trust obligations, or a hybrid of the two. Each form of joint tenancy has different dispositive consequences on death.
Where assets are owned both legally and beneficially as joint tenants, on the death of one joint tenant, his or her interest disappears by operation of law leaving the survivor(s) as the sole owner(s). Because the interest ‘disappears’, it does not comprise part of his or her estate, nor does it pass to the personal representative of the deceased joint tenant. Accordingly, the former jointly owned asset is not subject to the claims of any creditors of the deceased joint tenant, nor to the terms of an individual’s Will (or other estate planning documents). If a gift into joint tenancy is intended then the donor should be sure to document this intention as the onus will be on the donee to prove a gift was made except in very limited circumstances. Note that a transfer into joint tenancy of this sort is a disposition for tax purposes and can trigger tax on capital gains in some contexts.
It is possible for the legal title to property to be transferred into joint tenancy, but for some or all of the beneficial interest in that property to be retained by the donor. In typical circumstances the arrangement is evidenced by having the new joint tenant and the original owner execute a declaration of trust in which they confirm that they hold the jointly held assets in trust as a bare trustee for the beneficial owner. The transfer of legal title only does not result in a disposition for income tax purposes. On the death of the beneficial owner, the survivor will become the sole legal title holder to the property by right of survivorship, but, by virtue of the declaration of trust, will hold the title to the property in trust for the estate of the deceased beneficial owner and the assets will therefore be subject to the terms of the deceased’s Will. If probate or administration is required the whole value of the jointly held asset would, in this case, be included in the probated estate.
The Supreme Court of Canada has also acknowledged a new planning option through joint tenancy. In the decision of Pecore v. Pecore, 2007 SCC 17, it was held that in addition to a true joint tenancy or a bare trust, it is possible to create a combination of the two. In that case, a transfer into joint tenancy was held to result in essentially a bare trust for the transferor’s lifetime, but an immediate transfer of the right of survivorship. This allowed the jointly held property to pass outside the estate while allowing the original owner to keep full ownership during his lifetime. The splitting of the right of survivorship from the other incidences of joint ownership is a departure from the previously existing common law.
Recently in Sawdon Estate v. Sawdon, 2014 ONCA 101, the Ontario Court of Appeal held that a fourth outcome of a transfer of property into joint tenancy was possible. In Sawdon, a transfer into joint tenancy resulted in a bare trust for the transferor’s lifetime as in Pecore, but unlike Pecore the transfer did not intend for the surviving joint tenant to become the beneficial owner of the account by right of survivorship. Instead, the transferee only had legal title to the account and the original owner and the joint owner hold the property impressed with an inter vivos trust of the right of survivorship for the benefit of others.
Therefore, the intention of the parties when entering into a joint tenancy cannot be presumed and should always be discussed, understood and clearly documented to clarify what is to occur on the death of a joint tenant.
2.4. Inter vivos trust planning
There are numerous forms of inter vivos trusts (i.e. trusts created during life) that are used in estate planning and a exhaustive discussion of them is beyond the scope of this paper. However, a few such trusts are highlighted and summarized below for illustration purposes. Important to understand is that when assets are transferred to a trust during the lifetime of the individual the assets are removed from the estate of the transferor and instead are subject to the terms of the trust deed. This can avoid probate and often variation. Note that care must be taken to ensure that the tax and other consequences of creating the trust are carefully considered, which is also outside of the scope of this paper.
2.4.1. Alter ego trusts
An alter ego trust is an inter vivos trust created after 1999 by a settlor who is 65 years old or older. The terms of the trust must provide that during the settlor’s lifetime the settlor is entitled to all of the income of the trust and no person other than the settlor may receive or otherwise obtain the use of any of the capital of the trust before the settlor’s death. Further, both the settlor and the trust must qualify as Canadian residents. If a trust qualifies as an alter ego trust then typically assets may be contributed on a rollover basis by the settlor. The assets are deemed disposed of on the death of the Settlor.
On the settlor’s death, the terms of the alter ego trust may provide for the distribution of the assets to beneficiaries in a similar manner to what the settlor’s will would otherwise provide and therefore alter ego trusts are often considered will substitutes. As with other forms of inter vivos trusts, the distribution on death is outside the estate of the settlor and free from claims under the wills variation provisions in WESA unless attackable on other grounds.
2.4.2. Joint Partner Trust
Much like alter ego trusts, joint partner trusts are inter vivos trusts created after 1999 by a settlor 65 years old or older. Under the terms of the trust, until the death of the last survivor of the settlor and his or her spouse or common-law partner the settlor and the settlor’s spouse or common-law partner between them are entitled to all of the income of the trust that arises and no person, other than the settlor and his or her spouse or common-law partner, may receive or otherwise obtain the use of any of the income or capital of the trust before that survivor’s death. To qualify, both the settlor and the trust must qualify as Canadian residents. As with alter ego trusts, the settlor may contribute assets to a joint partner trust on a tax deferred basis.
Again, on the death of that survivor, the terms of the joint partner trust can provide for the distribution of the trust property free from the probate process and free from claims under the variation of wills provisions in WESA. A deemed disposition for tax purposes occurs on the death of the surviving spouse.
2.4.3. Spouse Trusts
Spouse trusts are inter vivos trusts or trusts created by a Will the terms of which provide that all of the income of the trust arising during the lifetime of the spouse of the settlor must be paid to the spouse, and no person other than the spouse can during his or her lifetime receive or otherwise obtain the use of any of the capital of the trust. On the death of the spouse, the trust property can be distributed to the intended beneficiaries free from claims of creditors of the settlor or his or spouse and outside of the individual’s estate. Contributions to a spousal trust qualify for the spousal rollover and there is a deemed disposition on the spouse beneficiary’s death.
3. Additional considerations for special circumstances
While the above canvasses the components of a basic estate plan, an advisor should exercise care in even the most basic of plans. Clients often have specific circumstances that warrant adjustment and revisions to those general components.
To illustrate, a client may have contractual obligations during his or her lifetime that might impact the disposition of his or her property on death. For example, a shareholders’ or other business agreement, a marriage or separation agreement to which the client may be subject impose contractual obligations that will need to be performed following the client’s death by his or her personal representatives.
The client or a beneficiary may have circumstances, such as creditor, matrimonial or addiction concerns, that would influence the proper structure for estate planning. For example, there are particular rules and guidelines that should be considered when preparing an estate plan for a disabled client receiving provincial disability or setting up an inheritance for such a person. If these rules are not taken into consideration government benefits could be discontinued.
Finally, citizenship and residency of the client and his or her beneficiaries should also be canvassed and the potential tax consequences explored. This often results in the necessity for outside counsel and the restructuring of the “basic” plan. For example, U.S. citizens, no matter where resident, are subject to U.S. income tax and transfer (i.e. gift and estate) taxes. Accordingly, the disposition of assets during lifetime, such as transferring assets into an inter vivos trust, or on death should be considered with the U.S. tax regime in mind.
4. Additional considerations for sophisticated assets
The type of assets an individual owns and the related tax attributes can also have an impact on the planning that should be implemented. Therefore, important to each individual’s estate plan is a complete and accurate inventory of his or her assets, information on where the asset is located, estimated values and how the asset is titled (i.e. joint tenancy, in trust, individually, etc.). This paper highlights two categories of assets below that require additional attention and specialized advice: family owned business and assets in a foreign jurisdiction.
4.1. Family owned businesses
Estate planning for family owned businesses involves a number of complexities that do not often arise in the planning for other assets. The additional planning strategies implemented for family owned businesses are shareholder agreements, multiple will planning, estate freezes and/or family trusts and marriage or cohabitation agreements. Each of these strategies are summarized briefly below.
4.1.1. Shareholder agreement
Key to many family businesses is the implementation of a shareholder agreement, which sets out the rules for co-ownership of the business. Issues that are usually covered in shareholder agreements include management and financing of the subject companies, distribution of profits, fundamental changes to the business or holdings of the company, and provisions relating to the transfer of shares during the lives and on death of the shareholders. A shareholder agreement should be considered even when a company has only one shareholder if succession to the next generation is contemplated with provision made to ensure it will be binding on future multiple shareholders, including the deceased founder’s estate. Unfortunately, too many business owners appreciate the need for an agreement only after problems arise that could have been resolved or avoided by an agreement.
4.1.2. Multiple will planning
If the individual holds shares in a private corporation in British Columbia, he or she may want to consider utilizing a multiple will planning strategy. Under the B.C. Business Corporations Act, private corporate shares may be transferred on death without probate in certain circumstances. In order to take advantage of this provision it is necessary to take steps to ensure that the shares do not have to be disclosed in a probate application. This is possible if the individual has a Secondary Will dealing with those shares. The Secondary Will should have a different Executor from the one named in the Primary Will.
Using this dual Will strategy should eliminate the need for probate on an individual’s private corporate shares; however, one potential thorn in the multiple Will plan is the prohibition in section 155 of WESA against distribution of an estate within 210 days of the issuance of a representation grant without the consent of all beneficiaries or intestate successors entitled to the estate or a court order. Where no grant is obtained distribution can, therefore, not occur unless the consents or court order are received. In circumstances where an unprobated will has minor beneficiaries or where the class of beneficiaries is not yet fully ascertained a court order may be necessary in order to avoid an executor acting in breach of the statute and thus being personally liable to make the estate whole.
A further detractor from the use of multiple Wills is it does not assist with dispute resolution as both Wills are subject to a variation claim. Multiple will planning requires careful drafting to avoid inadvertent conflicts, revocations and duplications.
4.1.3. Estate freeze and family trust
One common estate planning tool for individuals owning shares in family owned business is the implementation of an estate freeze. An estate freeze is a reorganization (or an incorporation of an unincorporated business) that is used to “freeze” the value of shares (or assets) in the hands of the current generation and cause future growth to accrue to a different person or persons. It is typically carried out on a tax deferred basis so that existing accrued gains are not recognized, or are recognized only to the extent they can be sheltered using an available capital gains exemption. The effect of the freeze will be to limit the capital gains that will be realized by the current generation on death to the gains accrued to the date of the freeze. This limits the incidence of taxes (and, to a lesser extent, probate fees) arising on death based on the existing value. Growth in the value of the business that accrues after the freeze will not be taxed on the death of the current generation, but instead will accrue to the successors to the business and be taxed only when they die or dispose of their interests. An estate freeze will thus facilitate a transfer of a business from the current generation to the next by reducing the incidence of tax on the transfer.
In most estate freezes, it will be appropriate to include a family trust, which will acquire the new “growth” shares of the company being frozen. Typically, this will be a discretionary family trust. A carefully considered and well drafted family trust can provide a great deal of flexibility in an estate plan. It may also provide creditor and family relations protection and tax benefits.
4.1.4. Marriage or cohabitation agreement
An individual who has an interest in a family business and who is planning to marry, or enter into a marriage-like relationship, should be advised on the merits of a marriage or cohabitation agreement in protecting the individual’s business interests from division on a breakdown of the relationship. Similarly, where members of subsequent generations might inherit ownership interests, consideration should be given to whether there is a requirement to enter into a marriage or cohabitation agreement before obtaining an interest. When a marriage or marriage-like relationship breaks down, a division of property of the spouses occurs. The rules governing property division are specific to the province where the spouses reside. Typically under British Columbia law the growth of assets during a relationship is subject to division as are assets earned during the relationship. The impact of division of property on any closely-held business can be significant. Failure to consider these issues could result in the business having to be sold to satisfy an owner’s obligations to a former spouse.
4.2. Assets in a foreign jurisdiction
An individual who has assets, in particular real estate, located in a foreign jurisdiction should obtain advice from lawyers in the jurisdiction as to (a) the effectiveness of his or her Will in disposing of the property on death, including the validity of the Will generally; (b) the effectiveness of his or her power of attorney in managing the property if the individual is unable to; (c) the tax consequences surrounding the property generally and on transfers during life and on death; (d) probate avoidance options including basic information on the probate process applicable on death; and (e) any other advice the local counsel deems relevant. The legal treatment of real estate and its distribution will typically be governed by the laws of the situs of the land in question. For example, many jurisdictions have forced heirship regimes or other restraints on testamentary freedom which can have a significant impact on an individual’s succession plan.
As an example, while Canadian citizens who are not otherwise U.S. citizens or U.S. residents are not subject to U.S. estate tax on their Canadian assets, they are subject to U.S. estate tax on U.S. situs property. U.S. situs property for U.S. estate tax purposes includes, among other things, U.S. real property, shares in a U.S. corporation, and tangible personal property located in the United States. While there are credits under the terms of the Canada – United States Tax Convention (1980) (the “Treaty”) which may reduce or eliminate an individual’s U.S. estate tax exposure, the availability and amount of the credits should be confirmed as should planning options available to assist in structuring an individual’s estate planning.
Without appropriate specialized advice, an advisor should not assume that an individual’s current plan will be advisable or even effective in other jurisdictions.
5. What happens without a plan on incapacity
If an individual is incapable of managing his or her own affairs and/or person and has done no advance planning, a determination must be made under the law as to who will act as that individual’s substitute decision maker. Different legislative schemes apply for financial and personal matters.
5.1.1. Without an appointed financial representative
Without advance planning, such as an enduring power of attorney or a Section 7 Representation Agreement, both of which we discuss below, where there is a loss of capacity to manage affairs and management of those affairs is required, it is necessary to obtain a court declaration of incapacity and a court appointed adult guardian (called a “Committee”). The individual becomes a “patient” under the Patients Property Act, R.S.B.C. 1996, c. 349 (“PPA”), and the Public Guardian and Trustee (“PGT”) becomes the “statutory” committee of the individual’s affairs. The appointment of the PGT can be avoided or replaced if the court appoints another committee. Typically preference is given by the court to the immediate next-of-kin.
There may be several available candidates who may wish to apply for committeeship and therefore, when applying the applicant will need to secure the consent of those who would also have a right to apply. Disputes can arise over control of the patient’s assets. The applicant will also need to post a bond or other security, which can be a costly and intrusive process for the applicant. A committee must account regularly to the PGT.
The process to be appointed a committee is expensive, as it involves an application to the court. Further, the PGT is involved, both at the application and on an ongoing basis if the committeeship is granted, and this can increase both the costs and time involved.
5.1.2. Without an appointed health care representative
If an individual is determined to be incapable of making his or her own health care decisions and has no Representation Agreement, a temporary substitute decision-maker (“TSDM”) is selected pursuant to hierarchy set forth in the Health Care (Consent) and Care Facility (Admission) Act. In general terms this act gives preference for such authority to the immediate next of kin and moves down the line to close family and friends. Assuming an individual is available to act, this may not have been the individual’s preference. Furthermore, there may be more than one person qualified to act and so disagreements can arise as to who should be appointed.
Even if the TSDM appointed is the preference and is appointed without disagreement, the person appointed will be somewhat restricted in the decisions that can be made. For example, a medical team will be given ultimate decision-making authority (with the ability to veto the TDSM) concerning the refusal of health care that would otherwise preserve an individual’s life. A TDSM is not permitted decision-making authority over personal care.
6. The basic estate plan for incapacity
When planning for incapacity, there are two main areas that need to be considered. The first being an individual’s financial and legal affairs and who should manage them in the event the individual is unable or unwilling to do so on his or her own. The second area being an individual’s personal and health care and who should make such decisions on the individual’s behalf if he or she is otherwise unable to.
6.1. Handling your finances and legal affairs
If an individual is incapable, his or her financial and legal affairs will need to be managed by a legal representative. As set forth above, where no planning has been done this would be by way of a committee appointed by the court under the PPA. If planning has been undertaken, an enduring power of attorney or a section 7 Representation Agreement will assist.
6.1.1. Enduring power of attorney
An enduring power of attorney is a legal document whereby an individual appoints one or more attorneys, and perhaps an alternate, to manage the individual’s financial and legal affairs if the individual is otherwise unable to do so on his or her own. It is labeled “enduring” as it expressly states that the appointment of the attorney endures the incapacity of the individual appointing. The default rule is that an enduring power of attorney is effective immediately upon execution unless otherwise specified upon an event, such as the incapacity of the individual appointing.
In British Columbia, powers of attorney and the attorneys appointed thereunder are governed by the Power of Attorney Act, R.S.B.C. 1996, c. 370. That act sets out duties owed by attorneys including that an attorney must act in the individual’s best interests, taking into account his or her current wishes and any direction to the attorney set out in the enduring power of attorney.
An individual may authorize an attorney to make decisions on his or her behalf and do anything that the adult may lawfully do by an agent in relation to the individual’s financial affairs, although powers of attorney can also be limited in scope. One of the few things an attorney is specifically prohibited from doing by the Power of Attorney Act is making or changing a Will for the individual. However, subject to certain limitations, it may be possible for an attorney to take part in certain trust planning for the individual.
The Power of Attorney Act should be reviewed to determine whether the default statutory powers granted thereunder are consistent with the individual’s wishes for the administration of his or her estate while incapacitated. For example, the default gifting power granted to attorneys by the Power of Attorney Act is particularly limited in that without an express provision in the document gifts are limited to 10% of income or $5,000 annually, whichever is less. This may not be consistent with the individual’s current gifting arrangements or his or her desire to provide financial support to family members, or to continue making charitable gifts. In such case broader powers to gift may be included. In addition, the individual may wish to expand the powers granted under the enduring power of attorney to permit future estate planning to respond to changed circumstance or changes in the law.
6.1.2. Section 7 Representation Agreement
For those individuals with diminished capacity who have not given a power of attorney, a Section 7 Representation Agreement (a “Section 7”) may be an option. A Section 7 can be made by an individual who has less than full legal capacity. The representative’s authority when concerning an individual’s financial affairs is limited to “routine management”. A Section 7 can also be created with respect to health care decisions and this is discussed further below.
The required capacity to create a Section 7 is not defined exclusively, but includes reference to a desire to appoint a decision-maker, awareness that decisions can be made on behalf of the adult, the adult can express choices (including approval or disapproval of others), and an ability to express trust in the decision-maker.
The Section 7 is effective immediately, but does not remove decision-making ability from the individual. Instead the representative has legal status when his or her assistance is needed.
Subparagraph 7(1)(b) of the Representation Agreement Act authorizes a representative appointed under a Section 7 to help the individual make decisions, or to make decisions on behalf of the individual, as it relates to the “routine management of the adult’s financial affairs”, including but not limited to the payment of bills, the receipt and deposit of pension and other income, as well as the purchase of food, accommodation and other services necessary for personal care. A non-exhaustive list of activities which constitute “routine management of the adults financial affairs” are outlined in the Representation Agreement Regulations. Notably, routine management does not include the sale of land.
A Section 7 requires the appointment of a monitor, except in specific circumstances. The monitor’s function is to ensure that the representative is carrying out the representative’s obligations to the adult as set out in the agreement and by law. Exceptions to the requirement for a monitor include where the representative is the client’s spouse, or if several people are appointed who must act unanimously.
6.1.3. Nomination of a committee
If an individual has failed to put in place any of the foregoing planning tools, or complications arise with the power of attorney or representation agreement, someone may need to apply to court to obtain some or all of the powers otherwise given by the power of attorney or representation agreement. Currently, that would be done under the PPA by the appointment of a committee (over the estate, not the person). The preparation of a Nomination of Committee, setting out preference for who should be appointed in this role, can be beneficial even if a last hope or defensive planning effort.
For example, while generally the person to be appointed as committee must post bond as security, it may be possible to avoid the bond requirement in a Nomination of Committee.
In addition, if the individual foresees the likelihood of a dispute as to his preferred power of attorney appointment, he could support this appointment by preparing a Nomination of Committee. Therefore, if a dispute arises and there is a successful application to terminate a power of attorney, the termination would be in favour of the named committee (which could be the individual appointed under the now terminated enduring power of attorney).
6.2. Health and personal care decisions
Representation Agreements, “living wills,” Advance Directives, and Nominations of Committee are the tools for managing an individual’s personal and health care decisions when he or she is otherwise unable to.
6.2.1. Representation Agreement
A representation agreement enables an individual to appoint a “representative” who can make decisions on behalf of the individual if he or she is incapacitated. The Representation Agreement Act permits two types of representation agreements: (1) the standard Section 7, described in part above; and (2) the enhanced section 9 representation agreement (a “Section 9”).
As set forth above, the Section 7 is generally implemented when an individual does not have the full capacity required for an enduring power of attorney. A Section 7, when concerning health care, can grant decision-making ability for “major health care and minor health care” as defined in the Health Care (Consent) and Care Facility (Admission) Act but cannot grant authority over refusing consent to care necessary to preserve life. As noted above, if the representative appointed under a Section 7 is any person other than a spouse of the individual, the PGT, a trust company, or a credit union, then a monitor must be appointed.
A Section 9 provides for a broader agreement that enables an individual to grant the representative the power to make decisions on the individual’s behalf with regard to all health care and personal care matters, including end of life decisions. This includes such broad reaching decisions as where the individual should live; whether the adult should participate in educational, social, vocational, or other activities; who the adult should associate with; giving or refusing consent for health care; and physically restraining or moving the adult.
6.2.2. Nomination of committee
As above, a Nomination of Committee can be used by an individual to appoint who should be appointed under the PPA if proceedings are brought. While a Representation Agreement is preferred over such planning, a Nomination of Committee can be effective defensive planning if the individual is concerned about a dispute as to who should be appointed and possible proceedings to remove the individual’s preferred appointment.
6.2.3. Advanced directive
Advance directives are directions aimed at health care providers without the need to involve a substitute decision-maker. It is an instruction to do or not do specific things related to health care. The health care providers must comply with the directive, unless the directions are prohibited by law or are one of a number of procedures or therapies listed in the Health Care Consent Regulation which may only be consented to by the patient.
Advance directives are sometimes preferred when an individual has religious beliefs prohibiting certain proceeds or in specific circumstances in which a diagnosis has been made regarding the immediate future and there is not a person whom the individual wishes to appoint to make decisions.
If a Representation Agreement has been executed, the advance direction would be considered a pre-expressed wish for the representative to consider, but the Representation Agreement will take priority over the advance directive.
6.2.4. Living Will
Some clients may prefer to express their wishes regarding end of life in a separate document which is not an advance directive (not legally binding on the medical profession) and considered to be a living will. Living wills are an expression of an individual’s wishes, typically concerning life-sustaining procedures in the event that death from a terminal condition is imminent despite the application of life-sustaining procedures or the individual is in a persistent vegetative state (permanent unconsciousness). If the living will represents the most current statement made by an individual regarding his or her preferences, it will be binding upon the person making health care decisions for an individual. There is currently no mandatory form of living will as they are not directly governed by statute.
6.2.5. Bentley v. Maplewood Seniors Care Society, 2014 BCSC 165
Recently the BC Court of Appeal had an opportunity to consider British Columbia’s health care and personal care law in the decisions of Bentley v. Maplewood Seniors Care Society, 2014 BCSC 165. The basic facts of Bentley are that the family of Mrs. Bentley, who had advanced Alzheimer’s, went to court seeking a decision that she not be given nourishment or liquids. Mrs. Bentley had previously made a form of written instruction, amounting to a living will, saying she would not want to be kept alive if she were ever in the circumstance she now found herself. The care facility in which Mrs. Bentley was residing, however, refused to stop spoon-feeding her or to release her to her family. The family sued.
The lower court decided the care facility should continue to spoon feed Mrs. Bentley because she was consenting to the feeding. The lower court also found that the living will previously made by Mrs. Bentley did not provide clear instruction to withdraw the type of feeding support she was receiving. Further, the court found that spoon-feeding fell under the category of “personal care” and not “health care” and that there is no legislative authority for default substitute decision-making for personal care that might result in death.
The case was appealed on the narrow ground of the issue of consent and not any of the other issues raised by the lower court. The court of appeal held that the family had not met the onus to rebut the presumption that Mrs. Bentley was capable of making the decision to accept or refuse to eat or drink.
While many practitioners agree the lower court was likely correct that there is no legislative authority for default substitute decision-making for personal care, the court’s comments that neither a health care representative nor a committee has authority to discontinue nourishment and liquids administered to the incapable adult by spoon is disagreed upon. Section 9(1)(b)(vi) of the Representation Agreement Act gives authority to a representative over “decisions about the diet” without any restrictions. Section 17 of the PPA gives the committee “all rights, powers and privileges that would be exercisable by the patient … if the person were of full age and sound and disposing mind.” These provisions are potentially broad enough to encompass such decision-making ability, but have not been judicially considered.
Regardless, it is important to note that the results may been different for Mrs. Bentley had she created both a Representation Agreement and an advanced directive clearly expressing she not be assisted in feeding or drinking and to be provided only palliative care in the circumstances she was under.
The “last resort” default estate plans should be considered just that: last resorts. While they serve a purpose, they are in rarely ideal and can often lead to financial, legal and emotional costs that could have been avoided. Instead the array of planning options available should be martialed to create a plan right for each client’s circumstances.