Annuities in a Will
From time to time, we see wills that direct the testator to purchase an annuity for a beneficiary.
The courts have held that where a will directs that an annuity be purchased, the beneficiary has the right to take its full value in cash rather than the annuity payments over time. In so holding, the courts apply the principle of law in set out in Saunders v. Vautier.
As explained in Jarman on Wills, 7th ed. (1930), vol. 2, p. 1109, the annuitant is entitled to the money because the annuity could otherwise be sold by him once he has it. It would be improper to require the annuitant to take an annuity which he or she could then resell. The principle also applies where the annuity is to be held by the trustee for the annuitant.
However, if there is a valid gift over, the principles do not apply. However, the effectiveness of the gift over provision must be carefully considered.
In Lotzkar v. McLean (1979), 6 E.T.R. 245 (B.C.S.C.), the will provided that the trustees were to purchase a life annuity for each of the two beneficiaries. The trustees were given absolute discretion with respect to the type of annuity to be purchased. Of note, the will expressly provided that the beneficiaries "shall not be allowed to have the value of such said life annuity in lieu thereof". The will also provided that in the event that a beneficiary died before all the benefits from such annuity have been paid, the balance was to be paid over to that beneficiary's issue.
Was this an effective gift over? The Court said no. The Court held that because the trustees had absolute discretion with respect to the purchase of the annuity, they could purchase annuities that did not provide for any benefit payable upon the death of the annuitant. Therefore, the gift over provision was not effective. Notwithstanding the express intention that the beneficiaries were not to have the value of the annuity, the Court found that the beneficiaries were entitled to request money in lieu of the life annuity.
Will drafters must be aware of this principle when advising clients and drafting wills. If the intention is to provide a regular income for a beneficiary on an ongoing basis, the simple direction to purchase an annuity in a will may not give effect to this intention. One of several techniques must be employed in order to insure that the beneficiary is not able to call for the immediate payment of the lump sum.
Paul Trudelle
