This week on Hull on Estates, Craig Vander Zee and Bianca La Neve talk about offers to settle in the context of a will challenge. They explain the difference between a will challenge and civil litigation and discuss several examples of will challenge cases.

Feel free to send us an email at hull.lawyers@gmail.com or leave us a comment on the Hull on Estates blog.

Offers to Settle in the Context of a Will Challenge – Hull on Estates Podcast #137

Posted on November 18^th, 2008 by Hull & Hull LLP

Bianca La Neve:  Hello and welcome to Hull on Estates.  You’re listening to episode number 137 on Tuesday, November 18, 2008.

Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada.   Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills.  Now, here are today’s hosts.

Bianca La Neve:  Hi and welcome to another episode of Hull on Estates.  I’m Bianca La Neve.

Craig Vander Zee:  And I’m Craig Vander Zee.  And today I think, Bianca, we were going to talk about Offers to Settle in the context of a Will challenge.  But first of all, how are you?

Bianca La Neve:  I’m great, how are you?

Craig Vander Zee:  Not too bad, did you have a nice weekend?

Bianca La Neve:  I did, we celebrated our 5 year anniversary this past weekend.

Craig Vander Zee:  Congratulations, but there’s many more to go.

Bianca La Neve:  Yes, that’s what everyone keeps telling me.

Craig Vander Zee:  What is the fifth anniversary?  Is that a paper…?

Bianca La Neve:  I don’t know and I know I didn’t get any jewellery so…

Craig Vander Zee:  Well I guess that’s the tenth year anniversary, isn’t it? 

But back to the Offers to Settle.  The starting point for all of this is to recognize that Will challenges, by their nature and the function of the Court with a Will challenge, is different than in civil litigation.  In civil litigation, it’s maybe A Co. against, A company that is against B company, there’s a winner, there’s a loser, the Court determines and then you have cost consequences that follow.  And in the context of having made Offers to Settle, those cost consequences that may follow an award usually may be affected by the Offers, depending on if the Offers are more favourable than what the result was achieved at trial.

In the Will context, of course, it is the Court that is granting the validity of the Will.  And in that case, as the Will, you know, is applicable to the world at large, or in rem as it is, the Court does have a function here.  Having said all of that, there is a case in Ulinick that is very often quoted that considered this very issue.

Bianca La Neve:  For background purposes, the facts of the case are as follows:  the deceased had executed a Will in approximately 1979 and at the time, the deceased had been in and out of hospital and had actually undergone major surgery.  One of the deceased’s children ultimately challenged the Will, asserting lack of capacity and undue influence by his sibling, who was the sole beneficiary of the deceased’s estate.  There were two competing opinions from medical experts as to the testator’s capacity during the time of the Will, but ultimately Justice Sheard dismissed the Will challenge.

Craig Vander Zee:  And in that regard, or perhaps more specifically, Justice Sheard found that with respect to the lack of testamentary capacity, that that allegation had been justified, that is, that it was reasonable to make in the circumstances because there was actually two expert neurologists who gave competing evidence at the trial.  And as such, he found on that issue while ultimately he dismissed that issue, he found that it was justifiable to bring it up.  And on that issue, he then found with respect to costs that the unsuccessful party shouldn’t have to pay the costs of the successful party.  It’s interesting to note, though, that with respect to the assertion of undue influence, that there wasn’t any justification according to Justice Sheard for bringing that allegation.  So with respect to that allegation, Justice Sheard found that whatever the cost of the proceedings were that could be reasonably demonstrated to have resulted from that allegation, were going to be on the shoulders of the unsuccessful litigant here.  And that is interesting because it wasn’t a case where Justice Sheard found that costs are payable out of the estate regardless of success, and considered even the separate allegations in terms of warding off the requirement to pay costs was going to be dealt with.  On the issue of Offers to Settle, though, Justice Sheard found that the offer made on the eve of trial didn’t factor into his consideration on costs.  And so in that respect, actually, His Honour found that the Offer to Settle didn’t have effect.

Bianca La Neve:  But Craig, other cases in Will Challenges have considered Offers to Settle.

Craig Vander Zee:  And that’s right.  And perhaps before touching on some of those cases, and we’ll probably just mention them by name given the time today, but I think it is helpful to consider the traditional approach to costs and the modern approach to costs when it comes to awards in Will challenges because it does seem to signify a change in the way at least the Court intends to look at how costs are going to be applied.

Bianca La Neve:  For many, many years, in most Will challenge cases, the Courts would order all or most of the costs of the parties to be paid out of the estate.  Not only was the Court disinclined to require the unsuccessful party to pay the costs of the successful party, it would also direct that the unsuccessful party be partially or even wholly indemnified by the estate.

Craig Vander Zee:  Well, and that meant that the traditional approach to the award of costs in a Will challenge really was a departure from the usual rule in civil litigation, which is to award costs following the event.  But while I completely agree with your comment, Bianca, that in many, many cases, for many, many years, it seemed that there was almost an impunity with respect to cost consequences in dealing with Will challenges for the unsuccessful litigant, that that’s not really what the traditional approach stood for.  And the traditional approach derived from a case called Mitchell and Garde which is a case from 1863.  And not really wanting to go through it, it really boiled down to two principles or policy reasons for an order for costs that would guide how the Courts should look at it.  And it was basically this:  that the usual rule that costs follow the event will not apply where firstly, the testator or those interested in the estate have been the cause of the litigation; and secondly, where the circumstances reasonably lead to an investigation of the Will itself. 

So in the first scenario, it’s where the testator has drafted a Will which would lead one, or has done it in circumstances which would lead one, to challenge it, so where the cause of the litigation is the testator or, again, those interested in the estate.  And then the second one is where there is a reasonable basis to have an investigation in respect of the document being propounded.  In those scenarios, costs will not follow the event.  But that became, over the years, interpreted by at least many judges to mean that there was impunity in bringing Will challenges.  In the modern approach, that was more spelled out in a very directed way by the Court of Appeal in its 2005 decision of McDougall Estate and Gooderham.

Bianca La Neve:  So in that case, the Court of Appeal found that the traditional approach had been displaced.  The modern approach to fixing costs is to carefully scrutinize the litigation, so the Will challenge, and unless the Court finds that one or more of the public policy considerations set out by Craig applies, then a Court should follow the cost rules that apply in regular civil litigation.

Craig Vander Zee:  And the Court went on to say, the modern approach to awarding costs at first instance, and again this is in a Will challenge, recognizes the importance of the Courts and the role that they play in ensuring that only valid Wills are executed by competent testators.  It also recognizes, though, and this is where it is set out I think expressly now, and clarified, that the need to restrict unwarranted litigation and protect estates from being depleted by litigation, is going to be front and centre.  And indeed, the Court of Appeal went on to say gone are the days when the costs of all parties are so routinely ordered payable out of the estate that people perceive there is nothing to be lost in pursuing estate litigation.  So from that perspective, the Court hasn’t said that in the appropriate circumstances, at least in my view, that an unsuccessful litigant in a Will challenge won’t get their costs or there won’t be the cost consequences that follow the event.  But if they find that the public policy reasons that I mentioned before or the basis I mentioned before are not fittingly applied to the situation, then civil litigation rules are going to apply.  And what that really is instructive as well is in respect of Offers to Settle because that would also mean that in the case where the public policy reasons are not affecting cost consequences and civil litigation rules apply with respect to costs consequences, that Offers should have that effect.  Offers to Settle have been, in a number of cases, considered by Courts in Will challenges.  But here it opens the door for a Rule 49 Offer to be more consistently applied because the Courts in the past have differed in their approach to Rule 49 Offers.

Bianca La Neve:  So Craig, you mentioned earlier we would go through some of the cases.  And in Barone Estate, without going into the facts, in the end the judge found that there was no incompatibility in applying Rule 49 and traditional non-estate cost principles to Will challenge proceedings.

Craig Vander Zee:  Well, that’s right and that was a 1997 case.  But then in a case the next year, the following year, Justice Haley found in Schwitzer and Pezecki that Rule 49 didn’t apply to estate proceedings.  But with respect to the applicability of 49, it really doesn’t end there.  And again, Rule 49 is the rule that specifically sets out, Rule 49.10, specifically sets out cost consequences when an Offer is made and is more favourable than the judgment that’s obtained, vis-à-vis the opposing party.  In a case called Kerner and Fiorelli which was a case back in 1990, so 8 years before Justice Haley’s decision, the Court found that Rule 49 could not be ignored.  So the case law regarding the applicability of Rule 49.10 seemed to have been unsettled.  But it seems to me that the decision in Gooderham opens the door for that applicability of Rule 49 in the appropriate circumstances.

Bianca La Neve:  So I think that’s a good place to wrap up today, Craig.  If any of our listeners want to leave a comment, they may e-mail us at hull.lawyers@gmail.com or you can visit our blog at www.estatelaw.hullandhull.com.  Thanks.

Craig Vander Zee:  Thanks very much, Bianca, it’s always a pleasure.

This has been Hull on Estates with the lawyers of Hull & Hull.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.

Our theme music is Upper Structure by DJ AKid  and is courtesy of the Podsafe Music Network.

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This week on Hull on Estates, Diane Vieira and Rick Bickhram discuss the issue of when an estate trustee is responsible to search for potential heirs to an estate.

Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.

This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the question of compensation and complaints regarding compensation.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.

This week on Hull on Estates, Ian and Suzana discuss developments in will changes. They reference cases from Key Developments in Estates and Trusts Law in Ontario ed. 2008.

Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.

Posted on April 29^th, 2008 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #110 of our podcast on Tuesday, April 29^th, 2008.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Suzana Popovic-Montag: Hi it’s Suzana Popovic-Montag.

Ian Hull: Ian Hull.

Suzana Popovic-Montag: And welcome to our podcast. We would just like to take this opportunity at the very beginning to remind you of the fact that we have a call in number for any of our listeners who have any comments on our podcast. Please feel free to call us at 206-457-1985.

Ian Hull: And also I encourage you to send us an e-mail at hullandhull@gmail.com or check out or daily blog which is easily found from our webpage at hullandhull.com.  Well let’s start working through some issues on the estate administration.

Suzana Popovic-Montag: That’s great Ian, we shall, but I just wanted to take a quick opportunity to let our listeners know that by the time this podcast is up, you will have done yet another appearance on a great show that’s called “Strictly Legal”, that is hosted by Michael Cochrane and for people who are interested in hearing Ian speak about issues of Estate and Trust matters in a more general all encompassing fashion, I highly recommend you to that show.

Ian Hull: Well thanks Suzana, its fun, it’s a great show. I’m looking forward to it. It’s thrown up on a video stream after on Business News Network, BNN Network so, it’s good fun.

Suzana Popovic-Montag: Good for you Ian.

Ian Hull: Alright, so where we left off in our last podcast was we were still struggling through some tax stuff because it is tax time here in Canada.  So we get a little focused on that and the easiest, I find, with files, the easiest criticism of any executor administering an estate is that they botched the tax filings or did any of the tax related stuff and so let’s talk a little bit about that.  But also let’s talk about the fact that, you know, again, if you’re not the expert in the tax side of things, get help.

Suzana Popovic-Montag: That’s for sure.

Ian Hull: So we mentioned the T1 terminal income tax return which is due and then we talked a little about how you dovetail in an interim distribution encouraging the party, the executors, I try to encourage my client, the executors. to get the money flowing as quickly as possible, knowing the restrictions that are out there, because there are some, we can’t just simply send it out.  But as soon as is safe, send it out with sufficient holdback. One of the reasons for the holdback is, of course, we have to pay taxes.

Suzana Popovic-Montag: And in addition to the T1 terminal return an estate trustee is going to prepare annually a T3 estate tax return.

Ian Hull: And that’s on estates that are not immediately distributable, so that if the assets are generating income, or there is a trust that is ongoing, or you just didn’t get it filed, the estate administered in the first year, Revenue Canada still wants their tax money on those, on the interest income or the growth and so forth.  So our annual T3 estate return needs to be filed, and that is approximately, again you can expect a Notice of Assessment  approximately six to nine months after that.

Suzana Popovic-Montag: One of the other things that we suggest to our clients to keep in mind after these tax returns have been taken care of, is to consider and to confirm that all CPP death benefits, that’s the Canada Pension Plan death benefits, have in fact been received on behalf of the estate.

Ian Hull: And also here in Ontario, we are forced to consider the issue of additional estate administration tax being paid.  And on this point, I was in Court the other day, not a case that I was involved with, but I was watching and I noticed that there was some argument between the government of Ontario and a big, it looked like a big estate, I didn’t follow all the details, but they were arguing over a refund.  The estate had, in fact, filed, and it turned out they had overpaid, they just basically overestimated the value of a big, big property, paid tax on it, the administration tax on it and then were now going back to the Court to work out a mechanism to get a repayment.  So, as is in life, possession is nine- tenths of the law. It reminded me of the adage that, you know, its always better to be conservative when you are making the filings, on the estate administration tax side because it can be more difficult  to get the money back than it can be to pay the money.  But obviously always being honest throughout the process.

Suzana Popovic-Montag: That’s good advice, Ian.

Ian Hull: I think really at this point, I just want to take a deep breath and look back at what we are doing because, and this is where some clients, we meet some resistance from clients because they sort of see us as trying to cover off too much sometimes. But I really, I often at this point will sit down and prepare a comprehensive reporting letter.  From our standpoint, for sure, we will report throughout.  But this is a good time also for the beneficiaries to receive something in writing directly from the executor.  There is nothing like personal contact, ongoing phone calls is a great idea as well.  Just keeping people up to date, keeping the process personal.  Because this is personal, this isn’t a business transaction, this is a life transaction.  So I always encourage my clients who are executors to pick up the phone or grab a coffee with some of the beneficiaries or even have an informal meeting with them at the local coffee shop.  But most importantly, I also suggest to them that they prepare a reporting letter.

Suzana Popovic-Montag: That is really good advice, Ian because it gives people then an opportunity to sort of see in writing all the hard work that you have done as an executor and the benefit of that, of course, being at the end of the day, when you want to seek compensation for your work as an estate trustee, you will have something to point the beneficiaries to in terms of the work and the hard effort that you have put forward in administering the estate.

Ian Hull: And it really is, it is not just self-serving, I think it is a natural reaction for people to, who feel that they are in the dark, no matter what you are dealing with, in business or, and in this case what is often a family situation.  Dialogue and communication is so crucial and so the more, the better.

Suzana Popovic-Montag: And then just sort of to wrap up the tax discussion that we had we want to turn our minds to the final income tax return and the preparation of that final T3, and then, of course, applying for the final Clearance Certificate in order to give the sort of seal of approval to all the tax filings that have been done to the estate trustee on behalf of the estate.

Ian Hull: Okay, so let’s talk this through a little bit because this is really the final bell for the tax filings, and this final T3 return and the final Clearance Certificate application is so important. Again, I typically will tell my clients unless they are the tax experts that I am not, make sure you send everything to the accountant.  This is the last chance to have sent all of the paper that you think might possibly relate to any of the assets of the estate to the accountant, let them decide what needs to be put to the taxing authority, not you.

Suzana Popovic-Montag: And then, of course, file the return, pay any taxes owing and just make note of the fact that you want to follow up the actual receipt of the Notice of Assessment for that final T3 return and typically that will come in about six to nine months.

Ian Hull: And then, of course, we have the second step and that is, of course, we will be looking for a Clearance Certificate.  But one of the things that people talk about, and without getting overly technical on the tax side, is what do you do when you want to wind up an estate because interest is always going to be accumulating?  And there is an easy answer, again not for my abilities to follow through on the mechanics, but the concept that: say there is a $100,000 left in the bank and you are holding that back to get your Clearance Certificate from CRA.  You filed your final T3 return, everything is really ready to go but there is this one remaining amount of money that is being held back because the accountant said look, you know what, this is a busy account and this individual did a lot of transactions over his lifetime and CRA could always come back and look, and that final look at the Clearance Certificate time, because we have to remember CRA, that’s the last kick they are going to get at it too.  So they typically take a pretty good, careful look at all of the tax activity of the deceased at that time.  But what you can do is, you can allocate the interest income that is being accumulated on the stop date.  So you, say you have some money left, you want to stop the estate, basically stop the clock running, so that you can indeed say it is over to Revenue Canada.  The go forward income accumulation just gets allocated to the beneficiaries.  And as I say, there are certain forms that get filed with the Revenue Canada and so forth to make that happen.  But it is an important step to allow you to bring close to the ongoing treadmill of interest income that is going to be coming in on the money you are holding.

Suzana Popovic-Montag: And that is a really good point to address in the letter that you write to the beneficiaries reporting on the administration of the estate and reminding them that at that point, that stop clock date or whatever you want to call it, at that point forward they have an annual obligation to themselves report that income and pay tax on it.

Ian Hull: And so now we are looking for that Clearance Certificate.  And even if that, as I say, the final distribution hasn’t been made, so you write a letter to CRA, you wait typically, it’s difficult to guess, it might be six to nine months, it might be more depending on the circumstances.  And once you receive that final Clearance Certificate you can send out your final distribution. 

Now one little twist, just as a final comment on the tax side is, is that you want also, I remind my clients to look at whether or not the deceased was a G.S.T. participant or registrant, because there can be special filings that need to be undertaken for that, and make sure that that’s been closed.  So your loop is closed fully on the tax side, you’ve diarized them and then in our next podcast, we are going to talk a little bit about the accounting obligations, not from the standpoint of the government, which we have gone through, it’s going to be hopefully no more tax time once we get in our next podcast, we are going to move into the accounting obligation as between the executor and the beneficiaries.

Suzana Popovic-Montag:  Well that is great, Ian.  Thanks very much.  I look forward to our next podcast.  And just a reminder again for anyone who has any comments about our podcast, please feel free to call us at 206-457-1985 or send us an e-mail at hullandhull@gmail.com or, of course, visit our blog and our webpage at estatelaw.hullandhull.com.

Ian Hull: Thanks Suzana.

Suzana Popovic-Montag: Thanks Ian.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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Posted on April 22^nd, 2008 by Hull & Hull LLP

Natalia Angelini: Hello and welcome to Hull on Estates. You’re listening to Episode #107 on Tuesday, April 22^nd, 2008.

Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada.   Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills.  Now, here are today’s hosts.

Natalia Angelini: Hi and welcome to another episode of Hull on Estates. I’m Natalia Angelini.

Chris Graham: And I’m Chris Graham.

Natalia Angelini: So Chris, welcome today. We’ve never podcasted before although it feels like we have.

Chris Graham: Many times Natalia, but I’m sure it will be a pleasure.

Natalia Angelini: Yes I think it will and today we’re talking about a subject that is quite interesting. We’re going to cover the issue of alter ego trusts. Now alter ego trusts are a newer instrument and it’s a type of trust that satisfies certain requirements under the Income Tax Act and which are defined in Section 248 of the Income Tax Act. So perhaps I’ll just start by setting out some of the requirements for an alter ego trust. Chris, you can feel free to jump in any time here.

So this is the kind of trust that is really appropriate for an older person because the settlor has to be at least 65 years of age at the time the trust was created. And the trust must have been created after 1999.  So it is, as I said, a newer type of trust instrument. The settlor also has to be able to receive all of the income of the trust that arises before his or her death and no one except the settlor may, before his or her death, receive or obtain the use of any income or capital of the trust. And I think finally the trust does not make an election referred to in the Income Tax Act and that’s, for anyone who’s interested, that’s in sub-paragraph 104, sub 4a, sub 2.1 of the Income Tax Act.

Chris Graham: That was a mouthful.

Natalia Angelini: That was a mouthful, I’m sure we’ll all be rushing to go look up the Section.

Chris Graham: Applies to pretty much any reference to the Income Tax Act.

Natalia Angelini: Exactly. So those are the requirements for an alter ego trust to exist and perhaps we can chit chat about some of its other elements.

Chris Graham: Yeah, I guess the first element that any lawyer will know, but people should also be aware of, is that a trust, including an alter ego trust, is a separate tax payer. For the purposes of paying taxes, it is its own person.

Natalia Angelini: That’s right Chris, good point. What else makes the alter ego trust distinct?

Chris Graham: Well, the rule against perpetuities which non-lawyers call the 21 year rule, some lawyers do too, of course, better than me, does not apply to deferral of capital gains tax until the settlor dies or until the capital property is disposed of during the settlor’s lifetime. So basically, if the settlor lives past age – say they create the trust at 65 and they live past age 86 which a lot of people are these days, well the rule against perpetuities in other trusts might kick in. It doesn’t kick in to the alter ego trust.

Okay, so in short, what happens is that on the death of the settlor, there’s a deemed disposition of the assets that are in the trust and capital gains taxes cannot be – they can’t be set against the settlor’s capital losses or capital losses in the trust can’t be set against the settlor’s capital gains. Since the trust is, it’s an inter vivos trust which means during the lifetime of the settlor, gains will be subject to tax at the highest applicable marginal rate.

Natalia Angelini: And that’s a good point and I think essentially income earned in the trust will be taxed as if the settlor earned it personally during his or her lifetime. So even though the 21 year rule does not apply, the trust can make an election under the Income Tax Act not to have a deemed disposition on the death of the settlor. So if that election is made, the 21 year rule will apply and there won’t be a rollover with respect to transfer of assets into the trust. And I think there’s one other element to an alter ego trust that we should cover.

Chris Graham: Yes, residence is a basic general rule, residence of the trustee will determine the residence of the trust, I think that’s pretty much trite in most cases. However here’s where the kicker comes in. If the trustee becomes a non-resident, the trust will also be deemed, in many situations, to have also ceased to be a resident of Canada and must therefore pay the deemed disposition of its assets. Now why does that matter? Well who makes these trusts? People at least 65 years of age, with a fair bit of money. What do most of those people do in the winter? They pack their bags, they’re smart people, they avoid our winters. They go down to Florida. And therein lies the risk of being deemed to have become a non-resident. We’re not immigration lawyers, we’re far from being experts in legal requirements of residency and what deemed rules are and when they kick in.  But we do know there’s something out there and if you create one of these trusts or you certainly have to keep this in mind and get some highly qualified advice.

Natalia Angelini: Now I’d like to cover some of the reasons that you would want to set up an alter ego trust because this is a kind of trust instrument that is, in my view, appropriate for a narrower scope of people and not as broad an audience as some other trust vehicles. I think its best when you’re dealing with a really large estate because the best or what seems to be the best advantage to setting up an alter ego trust is avoiding probate tax. So if you’ve got a large estate and you’re potentially going to be paying significant sums in probate tax and those sums are .5% on the first $50,000.00 and 1.5% on the balance of the value of a person’s estate. So those numbers can really add up.

And one of the other great advantages of an alter ego trust is the privacy factor. The value of your assets are not made public. So if that’s important to you, then that’s one advantage of that vehicle. And something else that you can benefit from by creating an alter ego trust is creditor protection, because ownership of the asset is transferred to the trustee. However you’ve got to be careful because if it’s ultimately challenged and the purpose of the trust is found to have been set up to avoid or defeat creditors, then those assets can be clawed back and you won’t be able to protect them against creditors.

Chris Graham: Absolutely, Natalia. Federal and provincial statutes, for instance, the Fraudulent Conveyances Act contain lots of very powerful ways that creditors can go after debtors who tried or purported to enter into transactions for the sole purpose of protecting assets from claims. That’s something obviously you have to get expert advice on because it’s a case by case basis and the statutes are complex and there’s lots of case law and all the rest of it. But if you’re looking to create an alter ego trust to defraud creditors or whatever, that’s not something that they were really set up for.

Natalia Angelini: And I think one of the other advantages to setting up an alter ego trust is the prevention of litigation because it is more difficult to challenge the validity of an inter vivos trust than a Will, for instance. So that is something to be kept in mind.

Chris Graham: And one practical advantage of it, probably not really what this type of trust is designed to do, but if the settlor settles this trust, an alter ego trust, and then later becomes incapable, well that particular – the assets in the trust are self-administering. In other words, no one has to go to Court and initiate expensive and potentially contentious guardianship proceedings in order to deal with this property. You don’t have to worry about “oh my god, this person who’s been running this company is suddenly out of the picture, what do we do? Everything’s falling apart”. No, it’s taken care of, it’s in trust, there’s a trustee, these assets are well in hand and they’re also being managed in accordance with a plan laid down by the settlor already.

Natalia Angelini: So I can’t think of any other reasons for setting up a trust off the top of my head, so maybe we’ll move to reasons that you might not want to set up an alter ego trust.

Chris Graham: One of the major reasons not to, is that when you put something into an alter ego trust or any trust, you lose control of that asset, it no longer belongs to you.  And it never ceases to amaze me how many people who have set up estate freezes and what not, don’t appreciate that fundamental point. It is no longer theirs when it goes into trust, whatever it is.

Natalia Angelini: That’s right.  So you certainly have to be mindful of that and if, on the other hand, you do appoint yourself as trustee being the settlor, you can retain some control but you’ll forfeit your right to use the trust to reduce overall tax liabilities. So there’s a pro and con to proceeding in that way as well.

Chris Graham: This brings us back to what we were saying earlier about not being able to write off capital gains based on maybe the settlor’s capital losses on death. There’s also that aspect of tax planning, which is way beyond me.

Natalia Angelini: I’ll leave that one alone. So onto – another reason that you might hesitate to set up an alter ego trust is naturally there’s going to be legal costs and costs of obtaining tax advice.  For instance, ongoing administration expenses, trustee fees and the cost of annual tax returns that need to be filed. So those are just some of the costs built in that, you know, may not be – some people may not be interested in incurring.

Chris Graham: I thought people liked paying their lawyers, their accountants, their dentists.

Natalia Angelini: Yeah I don’t think –

Chris Graham: Their financial advisors.

Natalia Angelini: So I think we’ve covered the nuts and bolts of an alter ego trust meaning what it is, what its elements are, the advantages and disadvantages of setting one up. And they certainly are, you know, a welcome edition to the tools available to people in planning their estates, particularly for the older client. However, the advantages of confidentiality and probate tax savings definitely needs to be weighed against the tax considerations and potential tax disadvantages to setting up the trust.

Chris Graham: It is a state-of-the-art statutory trust and as such, contained in the Income Tax Act, and as such it has a broad variety of advantages and disadvantages.

Natalia Angelini: If you’re interested in learning more about this subject or just in reading more on it, then there’s a couple of great papers that we can refer you to. One is by Elena Hoffstein. It’s called Alter Ego Trusts and Joint Partner Trusts: Tips and Traps. And she presented this paper at the Fifth Annual Estates and Trusts Forum. And there’s also a more recent paper by Tim Yuden, called – and it contains an annotated alter ego trust and that was presented at the Taxation of Trusts and Estates:  A Practical Approach Seminar on March 3^rd, 2008. So those are two great sources that we’ve certainly referred to in putting on this subject today and we hope that they help you as well.

Chris Graham: It’s nice light reading, too.

Natalia Angelini: Nice light reading. So I think that brings us to the end of our discussion this week. Thanks for listening and thanks for joining me,Chris.

Chris Graham: That was a pleasure, Natalia. I look forward to podcasting with you again soon, as always.

Natalia Angelini: Me too! So perhaps one thing we can leave you with is we’d be happy to hear from you, so you can send us an e-mail at hull.lawyers @gmail.com. Or give us a call at our comment line being: 206-350-6636.

Alternatively, you can also visit our blog page at estatelaw.hullandhull.com where you’ll get even more information and discussion on today’s practice of estate law. I hope you enjoyed the show. I’m Natalia.

Chris Graham: And I’m Chris.

Natalia Angelini: And until next time, so long.

This has been Hull on Estates with the lawyers of Hull & Hull.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

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