Lawyer working in the office. The document is signed by a female notary. Last Will Testament.
Roughly two in five Canadians report having an up-to-date will, meaning three in five don’t. And the affirmative responses were likely based on the respondents’ wills reflecting their wishes, rather than being up-to-date with tax, estate and family law.
Testators should review their wills on a regular or annual basis, ensuring that named executors, beneficiaries, guardians and bequests of property remain appropriate for their successful estate planning and administration. In addition, below are a few common yet less apparent considerations that may necessitate a trip to an estate planning lawyer’s office sooner rather than later. If left unchecked, these can significantly increase estate administration costs and difficulty.
Testamentary trust provisions
Testamentary trusts in wills are common as a way to hold gifts for beneficiaries until certain conditions are satisfied. Further, testamentary trusts are largely considered essential for holding gifts for minor beneficiaries until they reach the age of majority in their respective provinces in order to comply with provincial property rules and legislation related to minors.
Testamentary trusts have also been used to hold property for adult beneficiaries (or the beneficiary and certain family members) until they reach a certain age, a key event occurs, or the trustees elect to wind up the trust (if given such discretion).
Historically, these trusts were subject to graduated rates of tax, as well as other beneficial tax attributes. The general strategy for these trusts for tax purposes was primarily to retain income in the trust to use graduated income tax rates, maintain wealth (income and capital) for minor children, and provide beneficiaries some protection from creditors.
As a result of the testamentary trust rule changes in 2016 making testamentary trusts taxed at the highest marginal rate (other than graduated rate estates and qualified disability trusts), as well as the loss of certain tax attributes, combined with the subsequent changes to taxation and compliance requirements recently, many testamentary trusts no longer function as originally intended. Specifically, these trusts may become more costly to maintain than anticipated and create administrative issues that were not apparent when created. This is particularly the case for trusts with no ability to encroach on capital or to wind up early upon certain terms.
It is important to note that, while the beneficiaries named in these trusts may indeed be the intended beneficiaries of the trust and may therefore appear to be up-to-date, the mechanics and duration of these trusts may result in issues that necessitate a review and update by an experienced lawyer.
Generally, every year a trust exists, significant cost arises, whether for taxes, compliance or administration. One key factor to determine is whether the cost has a reasonable basis and whether the trust as drafted satisfies that basis.
Properly structured and considered testamentary trusts, including discretionary testamentary family trusts, still have significant utility from both tax and non-tax perspectives, such as maintaining wealth for adults and minors, allocating income to lower-tax-bracket beneficiaries, and providing creditor protection.
No-contest clauses
No-contest clauses, or “in terrorem” clauses, are often used in wills to attempt to create consequences for challenging the estate. Generally, no-contest clauses intend to direct that if a beneficiary challenges a will, the bequest is forfeited and is either gifted to other beneficiaries or forms part of the residue of the estate. These clauses, particularly in older wills, are often incomplete or do not reflect current law.
The goal of these clauses is not to outright prohibit litigation but to prompt a beneficiary to re-consider commencing action against the estate, since that may result in some or all of their bequest being forfeited, depending on the wording of the clause. In many instances, these clauses are effective for that reason alone.
Generally, a valid no-contest clause must also provide for an express gift if the beneficiary in question contests the will.
In most Canadian jurisdictions, a no-contest clause may not override statutory rights and benefits (such as maintenance and support under applicable dependants relief legislation) or deprive the court of its jurisdiction to deal with requests for help interpreting the will, provided such interpretation clauses do not dispute the will.
When no-contest clauses are used, they may simply be part of the lawyer’s standard practice, or there may be one or more underlying issues that justify the clause’s usage. In any event, it is often more effective to directly address perceived contentious issues in planning documents rather than hope the beneficiary will not commence action due to a no-contest clause. A discussion with an experienced estate planning lawyer can be highly valuable, both to create a more robust estate plan and to assess the viability of a no-contest clause based on the facts and laws of the province where the testator resides.
Beneficiary designations
A beneficiary designation and a registered product designation are generally considered to be “testamentary dispositions” and can be made either in the contract or will, provided the plan is described “generally or specifically” in the will. Generally, the last designation made will apply. When done properly, designations may allow certain assets to move outside the estate in an expedient manner, as well as allow more comprehensive planning for assets intended to enter the estate and a reduction in probate taxes where applicable.
Significant administrative issues can arise if intentions no longer match the applicable designations, such as in the following three scenarios.
Scenario 1. A poorly worded revocation clause in a will inadvertently revokes all beneficiary designations by generally referring to the plan, as well as revokes all prior wills and codicils as intended.
This scenario will complicate and add expense to estate administration, as it will need to be determined if the designations in the contract were truly revoked by the erroneous wording. If the designations were revoked, the estate generally becomes the beneficiary, which may be contrary to intentions and may result in increased probate fees. It can be particularly problematic where the beneficiaries named in the will and the revoked plan are different.
Scenario 2. The majority of the estate consists of registered plans designated outside the estate, after the will is drafted, as a way to “simplify” the estate and reduce fees.
Should this scenario occur, the estate may not have enough assets remaining to pay taxes, satisfy debts and cover administration costs, and may be insolvent as a result. This can result in tax liability being shared (to the extent of the value of the net proceeds) by the beneficiary of the plans[1], or by the executor if other creditors or beneficiaries are paid in advance of the Canada Revenue Agency.[2]
As well, should the executor attempt to remedy a shortfall in cash or assets by taking out a loan, it is important to note that loans between non-arm’s-length parties (except certain short-term loans) are typically seen as a contribution to the estate. This can taint the estate’s graduated rate estate status and prevent it from accessing certain tax benefits if not done carefully and with appropriate advice.
Scenario 3. There is a plan designation in a will with a testamentary trust created to hold the proceeds designated to the estate. A subsequent designation revokes the designation in the will; however, the plan designation names the executor of the estate — an adult child of the deceased — as beneficiary.
Because the will and designation are misaligned, uncertainty arises that may ultimately result in a costly and delayed administration. This scenario may also result in applications for judicial advice and direction, or even litigation. The risk of costly delays and disputes can be greatly exacerbated if there are any conflicts or acrimony among the beneficiaries, or between the executor and beneficiaries.
For instance, depending on the wording of the testamentary trust, there may be a question as to whether the trust is still valid or void.
From there, it is now a question of whether the designation was meant as a gift to the executor/child, or whether a form of trust arrangement exists whereby the proceeds are intended to be administered by the executor under the terms in the will.
If a trust arrangement, additional questions may arise as to whether the proceeds bypassed probate tax (as the proceeds may indeed pass to the personal representative at the date of death), and whether a financial institution will require proof of probate, negating any perceived savings intended by the change of designation.
Therefore, when reviewing a will, it is important to go beyond the will and review the designations in plans and policies and make sure they match. If a designation in the will and contract do not match, professional advice is required to determine why that may be the case and whether a change is needed.
[1] Income Tax Act, RSC 1985, c-1 (5th Supp.), ss. 160.2(1) or 160.2(2)
[2] Income Tax Act, RSC 1985, c-1 (5th Supp.), ss. 159(2)