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Listen to Delegation in Investment Accounts

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss delegation issues that arise when dealing with Investment Accounts and address a listeners question about the family cottage.

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.

Delegation in Investment Accounts - Hull on Estate and Succession Planning Podcast #119

Posted on July 1, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #119 of our podcast on Tuesday, July 1^st, 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 there, Ian.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: How are you today?

Ian Hull: I am great.

Suzana Popovic-Montag: That’s good.

Ian Hull: I think this podcast will actually be lodged into the internet through the mysteries of digital technology on Canada Day.

Suzana Popovic-Montag: Happy Canada Day everyone.

Ian Hull: Yes, big day here in Canada, and a big day for us as we continue our march towards our 200^th podcast. That’s our next benchmark, I guess, in some ways. We’re now at 119.

Suzana Popovic-Montag: Just a quick reminder to anyone who’d like to call in and give us feedback, comments on the show, please feel free to call us at 206-457-1985.

Ian Hull: And feel free, of course, to e-mail us at hullandhull@gmail.com, or jump on our webpage at hullandhull.com and surf around, find our blog, find all of the backup information that we tend to be using for a lot of these podcasts.  And we’re hoping to put more on where this summer’s project is looking toward trying to get some more video on there and certainly keeping the white papers on the website as well. 

So, before we begin our further analysis of the ever-pressing issue of investment accounts, when you’re putting together Court format accounts, I just wanted to talk about an e-mail that we received last week on our discussion about the prudent investor rule. And we got a great e-mail, again this is tied into some specific advice they were seeking so I’m just sort of summarizing what was being asked of us.  And the focus of the question was, just how much of a balanced portfolio do you have to maintain or how important is diversity when you have the main asset of the estate being the family cottage? And remember, we talked about the unique quality of a family cottage as an illustration of the escape clause that the Act and the Courts have allowed trustees to maintain an asset that, on the face of it, looks like it isn’t prudently being invested in the sense that it may be a wasting asset or it may be costing more than it’s making. And this person e-mailed us asking us what happens if it’s a fairly modest estate and you have essentially the bulk of the estate is indeed the family cottage? 

So it’s a tough question and one that, as all lawyers have to say because we are right when we say it, it depends on the facts and it depends on the circumstances. We didn’t get into any more detail on what this specific question was, but I’m going to add one layer onto that and that is, is that let’s say it is a trust for a surviving widow.  So in this case, a happily married couple, they have Wills that say all to the other in trust, and on the death of the final last person standing, everything to the child or the children, in this case there’d be two kids. So in that kind of scenario we have a surviving spouse, she’s 84 years old, the trust is only, and when I say only it’s made up of $900,000, $800,000 of it is the family cottage and $100,000 of it is cash. Well, in that kind of scenario, if the surviving spouse needs the money, then in that kind of situation it may be that the Court would say, you know what, you do have an obligation to diversify. Notwithstanding the fact that the two children are probably chirping away saying don’t sell the cottage, mom, it may be that that situation where, as a fiduciary, you have to assess it as being a unique asset certainly, but when you need cash, you need cash. So, again, it would depend on the personal circumstances of the surviving spouse and if she had her own wealth she may say, don’t worry, keep it. So that scenario works well, I think, as an illustration, because if the surviving spouse has their own wealth, and chooses to say to the fiduciary, don’t sell, then you’ve got some comfort to hang onto, it’s completely undiversified portfolio. But, if the surviving spouse says, I need the dough, then you’re faced with a difficult decision. And the third question would be, what about the children of the children, i.e., the grandchildren?  And what would the representative, the legal representative of the grandchildren, say about that diversification question?

Suzana Popovic-Montag: And that also raises, of course, the issue of the even hand rule and how a trustee has to maintain an even hand between the income and the capital beneficiaries of the estate. And I know we’ve talked, Ian, on previous podcasts a little bit about that rule as well as how a trustee would go about exercising discretion in light of the fact that the surviving widow either does or does not have her own assets in her own estate.

Ian Hull: And there’s that other layer, of course, that we’ve talked about, is that we’re not actually as a fiduciary allowed to ask the surviving spouse typically what they have or don’t have. So you’re hoping there’s some co-operation and some discussion that is frank and maybe outside the boundaries of what we’re allowed to ask. But I have seen cases where you’ve got the even hand rule tugging away at you and then, and that being basically, look, we’ve got to balance these three generations.  That this is the trust, the trust says look after the income beneficiary, the surviving widow, look after the children and keep in mind the grandchildren. So, I’ve seen cases where government agencies that monitor the grandchildren’s interest have insisted that that is not a diversified portfolio and that you have to seriously consider, notwithstanding the provisions of the Act, seriously consider selling the cottage. So really, from our perspective, I think what’s important to keep in mind is, if you keep, if you really want to keep a special cottage issue, or a chalet, or some recreational property, unique characteristic property, in a trust after you die, you’d better think through what all of the competing interests are going to be, and think through what the Court’s going to say to you. Because you may end up forcing the sale of this cottage property inadvertently, because of these competing interests.

Suzana Popovic-Montag: It really does underscore the importance of planning with proper professionals before these kinds of situations can unfold, so that you can sort of not predict but certainly try to anticipate the issues that can arise and perhaps creatively plan around that so that at the end of the day, you do have someone upholding what you ultimately intended to be your intentions.

Ian Hull: So I think that, anyway, I really appreciated the input from our e-mail participant on that one.  But it’s a good dovetail into the next concept I think that’s worth flushing out, because at the end of the last podcast, Suzana, you talked about this mutual funds and delegation and the kind of twists and turns that come up in the investment account environment. Let’s talk for a few minutes, if we could, about this concept of delegation first of all, and then dovetail it into this investment account problems that get created.

Suzana Popovic-Montag: And generally speaking, what we start with is the fact that as fiduciaries, we are somewhat restricted in terms of the level and the extent of delegation that we can make in doing our fiduciary responsibilities.  And one of the things that, in particular as I was saying previously years ago was a big issue with mutual funds, to what extent trustees could hire mutual fund advisors to actually help them administer these pools of funds and these assets.

Ian Hull: So when we say delegation, I guess we’re saying that we can’t hand off even the littlest jobs of any responsibility as a fiduciary. For example, signing a cheque. There is some authority that says that as a fiduciary we can ask someone else to give a Power of Attorney and ask someone else to sign the cheques. So in this situation, where we’re talking about delegation, we would say, hey we’ve got, the fiduciary is actually out of town most of the time but we’re running a bank account here. That fiduciary can delegate the job of signing the cheques probably.  but what he can’t do is delegate the decision-making to sign the cheque. So every time, say there was an income payment that had to be made and the fiduciary was out of town and their lawyer, for example, was in charge of sort of making sure the cheques went out once a month. Every time a cheque is written and signed, it has to be on the express instructions of the fiduciary. Now the fact that the lawyer, under a Power of Attorney, may sign the cheque is probably okay, but that’s a good illustration of what we say delegating. As long as you don’t give up the mental and the judicious decision to have the cheque signed, although you’re passing on the actual mechanics of it, you probably haven’t breached the delegation rule. Again, twists and turns, depends on the facts, but that’s an illustration of this delegation. And your example is the perfect one, because with a mutual fund, that was sort of like the ultimate delegation from a fiduciary standpoint, where you were a fiduciary, you handed $100 to an investment advisor and that investment advisor turned that money over, bought into different funds.  In the old days, they’d buy a bit of IBM, a bit of Bell Canada and you’d give them direct instructions. Well, with a mutual fund, of course, you’re handing it over to a further person, that is the fund manager of the mutual fund. So you give it to your investment advisor, who then hands it off to a fund manager.  And until the Act was changed in Ontario, there was some concern that that was essentially over-delegating. You had pushed out the decision-making too far. And it’s a really important point when you come to the expectations of the investment account which we’ll talk about more in our next podcast, but an important step. 

So in summary, we’ve got the old fashioned broker-client relationship untouched, but then we twisted it, we pushed it one step further and now we have some statutory protection to allow this sub-delegation, so to speak.

Suzana Popovic-Montag: And just to close the loop on that as well, we always underscore the importance of actually reading the documents and here the trust instrument or the Will, because that can be something that’s specifically planned for and language can be put into these documents that can authorize things over and above what the statute or what the common law itself provides for. So just another thing that we try to keep in mind in these situations.

Ian Hull: Well that’s great, Suzana. Hopefully we’ve had a good discussion on the question of delegation and certainly answered the question that came in from the listener. So thanks very much Suzana.

Suzana Popovic-Montag: Thanks to you, Ian and thanks to everyone who has joined us.   Again, just a quick reminder of our call-in number for any questions or any comments that you might have on the show, 206-457-1985.

Ian Hull: And any direct feedback, go to our blog at estatelaw.hullandhull.com or our e-mail at hullandhull@gmail.com. Thanks so much.

Suzana Popovic-Montag: Thank you.

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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Listen to "Closing the Summer's Cottage and Recreational Property Discussion"

In this week's episode of Hull on Estate and Succession Planning, Ian and Suzana consider the other factors to consider in the succession agreement.

Click "Continue Reading" for the transcribed version of this podcast.

Transcription

Closing the Summer’s Cottage and Recreational Property Discussion - Hull on Estate and Succession Planning Podcast #79

Posted on September 25^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #79 of our podcast on Tuesday, September 25^th, 2007.

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.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there, Ian. How are you?

Ian Hull: I’m okay. A little frustrated. I take this as our third take of this podcast, so this will be our best ever.

Suzana Popovic-Montag: And to those of you who don’t know Ian Hull, there is no such thing as a second take, let alone a third.

Ian Hull: Well, we get it right the first time, typically, but the technology is killing me. Anyway, no one wants to hear about our technology problems. We want to talk about cottage and recreational property problems some more. And I think we really are truly at our last of our mini-series, as I described it in one of our takes. It is not the equivalent of “Roots” but it’s still a mini-series, nonetheless.

Suzana Popovic-Montag: And I think quite appropriately timed as well, given that we’ve just celebrated the last weekend of the summer.

Ian Hull: So we’re looking at this cottage property, or recreational property conundrum. And we’ve talked a little bit about what’s in the agreement. So why don’t we spend the last podcast on this topic where we’re really flushing out the details of it, on some other factors to consider in the context of this agreement, whether it’s in the form of a trust or it’s in the form of a contract or a co-ownership agreement.

Suzana Popovic-Montag: Well, Ian, I think if we look at what happens in the circumstances when there’s the death of either a co-owner or a beneficiary, we can see that there are many ways that a trust or a co-ownership agreement can actually deal with these kinds of situations.

Ian Hull: So in the case of a trust, the terms themselves could set out that the beneficiary’s interest in this vacation property falls into his or her estate. Or it could provide that certain other beneficiaries would receive it within a class or of that nature.

Suzana Popovic-Montag: In the case of a co-ownership agreement, each owner might actually be free to dispose of his or her interest in the property by way of his or her Will.

Ian Hull: And that co-ownership agreement could also give the other co-owners the option to purchase the deceased’s owner’s interest from his or her estate.

Suzana Popovic-Montag: Or alternatively, the agreement could actually require the other co-owners to purchase the interest of the deceased owner.

Ian Hull: So again, there are many alternatives. And we just want to pause for a moment before we go into the other considerations that we want to talk about today. And I am reminded of the fact that what we’ve been trying to talk about in dealing with this cottage property issue is options that are available. And the trust agreement brings with it its own unique protections and flexibilities and so does the co-ownership agreement. And I think this last illustration is one where you can see the real delineation between the two choices. Because the death of a co-owner is easier to essentially organize in some ways than it is of a beneficiary in a trust arrangement. 

For example, with a co-ownership agreement, you could identify a mechanism. When the co-owner dies, this will happen. And you could expand that to say that when the co-owner dies, it will be going to some third party, maybe their share has to go to the Humane Society, or something like that. Whereas in a trust, it’s a little more complicated and it’s a little more awkward to direct where the ownership interest will go on death, if you want to go thinking outside of the box.

And the co-ownership agreement, as I say, might in the right circumstances create some better flexibilities. But a trust is also wonderful in its own way because it creates some real certainty. So for example, if there are three children that own the cottage and on the death of one of the children, the trust provides that the child who dies interest passes to his or her own children. So for example, in this case, to the grandkids, that one-third interest passes to the grandkids, it’s essentially entrenched in a trust arrangement which is very difficult to amend or vary in a future step. So it really is, like that example is something that you’ve got Court protections to make sure that that gifting will fall in that way. Whereas with the co-ownership agreement, you’ve really only got contractual protections. And that really, I think, underscores the big difference between what we’re talking about in a co-ownership agreement and in a trust agreement. And that is, is that the scrutiny of the Court is almost, well it’s overwhelming in the context of a trust arrangement. And it is less overwhelming, if I can put it that way, in the context of a co-ownership agreement. So whether you have flexibility or not, at the end of the day, you have to either decide that you want to be subject to the scrutiny of the Courts or not. And that is almost one of the preliminary questions you want to ask yourself and answer before you enter into either option.

Suzana Popovic-Montag: That’s a very important point, Ian. A good illustration of the distinction between the two arrangements that, you know, we’ve been talking about in terms of how to hold a cottage property. And it also, I think, in each situation, you can also deal with what happens in the event that one of the owners or beneficiaries becomes incapacitated.

Ian Hull: So the terms of the trust in the situation of incapacity, the terms of the trust or the co-ownership agreement, should outline what would happen if one of the beneficiaries or, in the case of a co-ownership agreement one of the co-owners, becomes incapacitated either physically or mentally, to the point where they cannot use the property.

Suzana Popovic-Montag: And I think the nature of the incapacity is also very important. Because if it’s a physical incapacity, for instance, and the property is one that would have required a lot of maintenance or a lot of work to be done on it, then that physical incapacity is going to mean something different in that circumstance.

Ian Hull: That’s such a good point because the limitations we usually think about are on the element of the mental capacity. If you lose mental capacity, maybe that would affect your ability to use it. But physical demands of a recreational property can be a unique circumstance to consider. So the physical incapacity is front and centre.

Suzana Popovic-Montag: And in the case of a co-ownership agreement, the other co-owners might be required in that circumstance, if there’s an incapacity of some nature, to purchase the interest of the incapacitated owner at the option of that owner or his or her personal representative, if someone is already acting for that person.

Ian Hull: Another thorny issue is to consider the whole mechanism to deal with the sale of the interest, as you’ve just pointed out, that option is given.

Suzana Popovic-Montag: And I think it’s safe to say that it’s probably easier to include terms that address beneficiaries or co-owners who want to sell their interests in a co-ownership agreement rather than in a trust arrangement.

Ian Hull: So while it’s not necessarily common for trusts to allow beneficiaries to sell their interests in the trust to a third party, in fact it’s uncommon, the terms of a co-ownership agreement alternatively though can easily give that owner that right. And that’s an illustration of what I was talking about earlier in the sense of the extra flexibility that comes from the contractual arrangement that isn’t as closely scrutinized by the Court as the trust arrangement.

Suzana Popovic-Montag: And the agreement could also give the other co-owners a right of first refusal, or even the option to purchase the interests of a co-owner at fair market value, as maybe some other alternatives.

Ian Hull: Okay, let’s talk a little bit about situations where you’re forced to dispose or some bankruptcy or financial problems, those kind of scenarios and how that might be dovetailed into an agreement.

Suzana Popovic-Montag: I think that you should probably try to anticipate or at least think about these situations arising in the future and try to include some terms to deal with the specific scenarios where the interest of a beneficiary or owner is actually seized or disposed of involuntarily.

Ian Hull: So we want to keep an eye on the ball a bit here, because for example, the creditor of an owner or beneficiary in the trust situation, might try to claim an interest. Or there might be some sort of family law claim by a spouse that may be not as welcome as he or she might have been in the family.

Suzana Popovic-Montag: And given those realities, you could choose to include a term that would permit the other owners or perhaps the trustees or even the other beneficiaries, to purchase the interest of that creditor or other outsider who’s attempting to actually seize or acquire the cottage property.

Ian Hull: So finally and not necessarily most important, but a really, really important clause that we like to see in these agreements, is a dispute mechanism, an alternative dispute mechanism formula that’s set up in the contract itself. And in some situations, it’s set up in the trust arrangements.

Suzana Popovic-Montag: And the reason you want to do that is because when you’re drafting either the trust or the co-ownership agreement, you try certainly to anticipate as many of the possibilities and the circumstances that can arise but there might be something that got missed or something that couldn’t have been anticipated at the time. And if you need to then try to change or to alter the arrangement, you would need a facility or mechanism by which you could do that. And as you suggested, an alternative dispute resolution mechanism is the best and probably the most cost-effective way to try to do that.

Ian Hull: And one of the things that I put right in those dispute mechanisms is to force the families first and foremost, force them to talk. And you say that any one of the co-owners, and it’s the trust situation, one of the beneficiaries, can trigger what we’ll call is a family meeting of that nature, doesn’t have to be in person, maybe you can do it by phone or video, to see if you can hash it out. And even at that first meeting, you may well want to have a facilitator involved so that not necessarily to mediate but to make sure that you move along on the issues that are bothering the parties. But that alternative mechanism is important.

Finally the last thing I just wanted to say is that we’ve had a busy week last week in our own professional practices. I spoke to a group of financial planners on Monday about trusts and litigation relating to trusts and some of the topics that we talked about have been raised in our recent podcasts and certainly over the years in Hull on Estates as well. The other thing that Suzana I know you and I are co-lecturing on is the Windsor Estate Planning Council that we went down to, to speak to financial planners, lawyers, and accountants on the family meeting and the family office, which was a great success and a lot of fun. And then I’ve got an Ontario Bar Association, I just spoke at was dealing with the whole question of recent developments of the Operation Update seminar that was held last Friday.

So we’ve been busy and those are all good avenues to consider, other different sources of continuing legal education, I highly commend you to.

Suzana Popovic-Montag: Well thanks very much, Ian, and I look forward to our next podcast.

Ian Hull: Thanks very much.

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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Listen to "Drafting a Co-ownership Agreement"
Read the transcribed version of "Drafting a  Co-Ownership Agreement"

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss things to remember when drafting a co-ownership agreement of a recreational property with family or friends.

Click "Continue Reading" to read the transcribed version of this podcast.

Transcription

Drafting a Co-ownership Agreement - Hull on Estate and Succession Planning Podcast #78

Posted on September 18^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #78 of our podcast on Tuesday, September 18^th, 2007.

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.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: Just great, I’m suffering through my allergies a little bit in the fall season, but no complaints.

Suzana Popovic-Montag: That’s good.

Ian Hull: Just before we start our podcast today, I thought I’d put a little plug in. I had a great opportunity to be interviewed last week by Donna Papacosta who is from Trafalgar Communications and many of us know her from her fantastic podcast, and she blogs as well. But her podcast called “trafcomnews.com”. Donna is someone I met at Podcasters Across Borders in June of this year. We had a great time, shared a couple of beers and some laughs and we sort of talked about each other’s podcasts. She is in the communications world and so since meeting her, I’ve been following her podcasts carefully and reading some of her blogs. She’s a PR communications specialist and the last few of her series of her podcasts have been helping teaching podcasts. And she tied it into the theme, going back to school and has given some great tips on how to podcast. So Donna’s a great friend from the social media world and I was honoured to be interviewed by her. And she was sort of curious about our world and what we were doing in our niche marketing and what we were doing from the podcasting standpoint. So it was a lot of fun.

Suzana Popovic-Montag: Well, that’s great Ian. I guess we’ll be looking for where that interview shows up. That’s wonderful.

Ian Hull: Yeah, I’m not sure when it’s coming in but she has to go back and, of course, edit everything I said and fix it up. 

So why don’t we, we’ve sort of got our own little mini-series going on here and that has been dealing with the cottage property or vacation properties. We just, in our last podcast, started to sort of talk about how we crafted the agreement. We talked a little bit about some of the things that we would want to include in the agreement, and not necessarily we don’t want to get into the drafting issues per se in the podcast, but some of the core concepts we may want to cover in the agreement itself.

Suzana Popovic-Montag: And just to sort of recap that, Ian, we were talking about, you know, creating a specific fund for maintenance and repairs or improvements that are going to be done to the property. We also talked about how we could go about implementing some terms perhaps for decision-making. And also the assignment of responsibilities within the context of that agreement.

Ian Hull: So let’s talk a little bit about one of the spicy issues whenever you’re sharing a recreational property, and that is, scheduling the use of the property itself.

Suzana Popovic-Montag: Ian, I think that the terms of this kind of arrangement, and particularly because it is the recreational property, should be set out as clearly as you possibly can, depending on whether or not you’ve got a trust or a co-ownership agreement.

Ian Hull: So, for example, before the beginning of each year, the various owners could draw straws for the use of the property at certain times. Or they could create a rotation so that each co-owner would be permitted exclusive use of the property for certain weeks.

Suzana Popovic-Montag: And I think the terms could even go so far as to provide that the rotation itself varies from year to year, over a cycle of years.

Ian Hull: So this drawing straws and rotation reminds me of the fact that us lowly Leaf fans here in Toronto get the chance every year, if we’re lucky enough.  I own a little part of season’s tickets and we have the same rotation and draw system that is involved. And we’ve tried to turn that into, we try to play a little game of golf, have a couple of beers after and laugh and make it a fun event. I say that sort of half tongue-in-cheek but also half seriously, because what you want to do is, because this issue can be a sensitive issue, you want to try to keep it as friendly and personable as you can and so you might want to turn it into, you know, getting together for a dinner, going through some of these issues, not just the scheduling issue, but some of these other issues and make sure there’s lots of wine and beer flowing.

Suzana Popovic-Montag: I’m sensing a theme Ian.

Ian Hull: Absolutely.

Suzana Popovic-Montag: Now, the terms of the agreement could also set out rules, I think, for others who might be using the properties. So, in addition to either the owners or the beneficiaries, if they want to consider an arrangement where other friends or other family members are either renting it or perhaps even using it for free.

Ian Hull: That’s a really good idea. You sometimes overlook that possibility and then you’re into the term of the agreement and you haven’t raised that as a possibility, that maybe a friend would come up or you may want to use your property week or weeks to generate your own income. Those can be sort of side issues that can be particularly problematic for some because some owners may not want to rent or they may not want strangers on the property. And so you may want to do your best to canvass that at the scheduling of the use of property meeting.

Suzana Popovic-Montag: That’s a good idea. I think a further thing that you’d want to consider when you’re entering these kinds of arrangements is to actually speak to what would happen in the event that someone defaults on whatever that they’re supposed to do pursuant to the agreement.

Ian Hull: That’s such a good point because when you have these arrangements, they are typically at a family friendly situation. And many of us don’t want to face the fact that what are the consequences of default and what sort of impact should there be felt by those who don’t follow the agreement, notwithstanding that some of them or more of them are family members.

Suzana Popovic-Montag: And just to give an example, I mean it would be something like if a co-owner is required to pay certain expenses to maintain the property and then suddenly they don’t do that, you want to speak to what happens in those circumstances when someone is not holding up their end of the bargain.

Ian Hull: So under a co-ownership agreement which we’ve talked about in the pats podcasts, there are more options for dealing with these kinds of contract defaults and more flexibility available.

Suzana Popovic-Montag: The terms could give the other co-owners, for example, the right to purchase the interest of the person who’s actually defaulting on his or her obligations.

Ian Hull: And that’s a good idea, because we recently were involved with a case where just that happened. And it wasn’t an unfriendly buy-out so to speak; it just turned out to be a situation that made the most sense for actually both parties. One, who was feeling the burden of ownership, needed the money for other reasons, and the other family member who really wanted to sort of consolidate the ownership group.

Suzana Popovic-Montag: And if you’re going to have that kind of provision in it, you want to make sure that the terms of your agreement perhaps even include some kind of formula that will somehow appraise the value of the person who’s actually defaulting his or her interest in the property, and whether or not, you know, you want to consider if there should be some kind of minority interest discount or something as well. So just yet another thing to sort of keep in mind when you’re drafting these kinds of agreements.

Ian Hull: Well, that minority discount is a good point and one that is often overlooked because, and again, because these are typically friendly and family situations. But in a business environment, if four people owned a recreational property and if one of them wanted to be bought out in a business environment, say you were a one-quarter shareholder of a corporation, typically the Courts would have found that you have a minority interest and therefore it is to be discounted to a certain extent, because by selling it, you’re only giving up…you’re not giving up control and so forth. In a situation where it’s a family friendly situation, if you don’t consider the minority discount issue at the outset, it can come as a big surprise if there’s three or four owners and Betty decides that she wants to buy out Bill. And Bill gets a big surprise that, because Betty, who is of course a merchant banker and knows all these things and says well, you know, of course, we haven’t talked about this Bill, but your third interest is well, it’s not quite worth a third. We’ve got a valuation, fine; I can live with that valuation. But it’s a minority interest and therefore it’s reduced to that extent. And you can really, you know, you can highlight this issue before and avoid the problems. Either agree that there will be no minority discount because it’s a special property, or agree what kind of formula you want to get into should a minority discount issue arise.

Suzana Popovic-Montag: And clearly, I think incorporating these kinds of consequences of a default in an agreement are so much more easier when you’re dealing with the co-ownership agreement, as opposed to a trust situation.

Ian Hull: Well, that’s right because, you know, the trustees in a trust situation, it adds a complication. And although we’ve talked about the different approaches to the co-ownership agreement or the trust agreement, trustees are considered fiduciaries. And the Courts are more willing to intervene in the operation of a trust than a co-ownership agreement. So that sort of fundamental premise needs to be kept in mind so that you either have flexibility or you don’t have flexibility, depending on the circumstances that you’re involved with.

Suzana Popovic-Montag: And if someone defaulted in the payment of expenses, this might actually be deemed to be a loan that’s owing by that person to the other co-owners or even the trustees.

Ian Hull: And the terms, again, you might want to provide that if the loan has not been repaid and other obligations of the defaulting person have not been brought into good standing within a certain period of time, make it time specific, again you want to consider certain remedies. What will be available to the trustees or if it’s a situation where it’s a co-ownership agreement, what’s going to be available to the co-owners? And again, you know, we’re always hesitant to do that because default in that means taking steps against typically a friendly situation, like a brother or a sister.

Suzana Popovic-Montag: Well, there certainly is a lot of flexibility and a lot of issues, I think, to keep in mind in these kinds of situations. And the fact that you at least can identify some of these issues can only help when it comes time to putting something, pen to paper essentially.

Ian Hull: Absolutely. Well I think that wraps up some more of our thoughts today anyway on the co-ownership agreements. And we’ve got a few more comments on that, that we may want to wrap up our podcast series with in the next podcast or two.

Suzana Popovic-Montag: That’s great. Thank you very much Ian, I’m going to go look for that interview of yours.

Ian Hull: Thanks Suzana.

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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Listen to "Vacation and Recreational Properties"

Read the transcribed version of "Vacation and Recreational Properties"

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss litigation involving vacation and recreational properties. This is an emotional as well as a legal issue. They talk about the realities of passing properties on to younger generations.

Click "Continue Reading" for the transcribed version of this podcast.

Vacation and Recreational Properties - Hull on Estate and Succession Planning Podcast #72

Posted on August 7^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #72 of our podcast on Tuesday, August 7^th, 2007.

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 there Ian.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: How are you today?

Ian Hull: I’m just great thanks.

Suzana Popovic-Montag: That’s good.

Ian Hull: Well, why don’t we talk about, on this hot summer that we’re having here in Toronto, a little bit about the vacation properties.  Not just cottages, but recreational properties generally. And I thought it might be fun to do…might take a couple of podcasts to do this but let’s work through this important issue in the context of estate planning. 

Suzana Popovic-Montag: I know certainly in our last podcast, Ian, you gave some great examples about these situations where they arise in real life where people are fighting over these exact kinds of properties.  And I just mention in passing that I noticed, certainly in my own practice, that these kinds of fights are becoming more and more common than even, you know, I would have imagined.

Ian Hull: So while a vacation property such as a cottage, for example, can certainly provide years of fun and pleasure for your family and during a lifetime. And it really is a goal of many owners to ensure that younger generations continue to enjoy these properties and so on. This transition to the next generation…well first of all, being able to own recreational property is a real luxury in that sense.  But the transition is also sort of an important part of the process.

Suzana Popovic-Montag: And why do you say that, Ian?

Ian Hull: Well, keeping a vacation property in the family has really become both an emotional and a legal issue. Because you, just by virtue of its unique characteristic, you create interesting emotions to the property itself.  It’s not just like the house. Certainly in our experience, when we see people fighting over property, over estates, almost always the sale of the family home goes without a hitch. But where the tension can arise is the sale of the cottage.  And that’s because often the younger generation has grown up in the environment and they’ve created fond memories and so forth, so that really at the end of the day, this isn’t just a piece of real estate, this isn’t just a GIC, this is part of their past and can attract a very different emotions.

Suzana Popovic-Montag: I think just to add to that there’s also the fact that recently there’s been such an escalation in property values.  And when you’ve got a piece of property in a very good area, that might mean that suddenly there’s much more than just an emotional attachment.  But there might also be a financial consequence to this property as well.

Ian Hull: And for sure.  We’ve seen lots of files where the estate is, a substantial portion of the estate is actually the recreational property.

Suzana Popovic-Montag: And what this will result in is potentially having a very onerous tax liability that can arise for your children or your family.  And, you know, it’s something that is just a reality and we’ve got to be able to plan for it and see what we can do to protect against being, you know, surprised at the end of the day.

Ian Hull: Well that’s right.  This whole high cost of buying out a family member who doesn’t want to own the property or, or (…) and allow it to be passed to another generation. We talked about in previous podcasts the use of interesting estate planning tools like insurance products and things like that. But it is a really live issue. So that overall, the costs of the buyout can in fact result in or unfortunately can leave for the sale of the property.  And that in and of itself may not be what you ever intended to happen in the estate plan.

Suzana Popovic-Montag: I think, Ian, it might be helpful to sort of discuss some of the strategies that we can think of or suggest to people for preserving the actual vacation property, the cottage property for the next generation, and some of the choices that might be available to individuals who are dealing with these kinds of assets.

Ian Hull: Okay, well then let’s talk about things like discussion with your…we’ve used…we’ve certainly talked about the theme of discussions with your heirs.  That’s one part of it.

Suzana Popovic-Montag: And I think we should maybe address specifically what, you know, the capital gains taxes can arise in these situations, and how we might have some strategies for considering how to maximize the use of products to minimize the insurance hit…or sorry, not the insurance…the tax hit at the end of the day.

Ian Hull: And certainly that managing of the taxes is so fundamental.  And then talk about transfers on death by way of, you know, joint tenancy, or a gift in a Will is another option or transfers prior to death by way of what we call inter vivos or pre-death transfers to one of the children who actually want the property and can afford to buy it out. I use that example because I had lunch the other day with a good friend of mine who’s got five kids in his family.  And sure enough, one of the kids bought out the grandmother’s property.  And adjacent to that was their family cottage where they grew up, his mother, the sister, obviously the daughter of the mother. And I asked him, I said, you know, does it bother that you’re brother just bought your grandmother’s cottage?  And she said no, you know, it doesn’t bother me because she said ultimately I think I’ll probably try to buy my mother’s cottage. And I don’t know that my other siblings want that cottage either because they all have their own cottages now, so it may not even be an issue. But I sort of had to test the waters and see if she was upset by that.  And I was pleased to see that that transition is working very well.

Suzana Popovic-Montag: You’d be surprised how these things can work out with a little bit of advance planning and obviously, you know, the frank discussion amongst the individuals who are affected by it.

Ian Hull: So finally, what we want to talk about is how to create an agreement that works for everyone. And you can’t just create these things with paper.  You have to have done your homework.  You have to have had your discussions.  You have to have done your work managing, looking at managing the taxes, managing the emotional issues on the transfer and so forth.  And talk about the different legal options you have pre-death, post-death, to transfer the cottage.

Suzana Popovic-Montag: If we turn, Ian, to, you know, the first step that we talked about, you know, the discussion with the family members. When you want to deal with these property transfers, it really is key to really talk to the individuals who are going to be affected by it. Because you might have all these preconceived perceptions of what you think someone’s going to think or feel, but that may not actually be the case.

Ian Hull: Because there’s a chance that they may not even want the vacation property, for instance.

Suzana Popovic-Montag: And so your adult children may actually just enjoy using it now but not really have an intention or an expectation at the end of the day that that property is there for them.

Ian Hull: And another option is too that some…your children may not be actually interested in sharing the cottage, in going through sort of a co-ownership arrangement.  And you won’t know this unless you’re asked.  And certainly the co-ownership arrangements are much more fragile once you’re gone, I can tell you that.  Because often the parents, who have held the cottage originally, are the glue that hold those co-ownership agreements, even with adult siblings, together.

Suzana Popovic-Montag: And so as an alternative to that co-ownership arrangement, you might just want to look to leave an equal share of the value of the vacation property to each of your children.

Ian Hull: But if someone wants to keep it and some want to sell it, then the ones that want to keep it may not have the cash of the others.  But you can start to do the math on this and really see if there are creative solutions that the children can come up with after you’ve passed away.  As long as you’ve divided it equally and given everybody sort of enough economic strength to consider their options.

Suzana Popovic-Montag: And that’s really important because you wanna protect against the possibility that, notwithstanding all of the planning you’ve done, your wishes might still be overturned and the property may still have to get sold in any event.

Ian Hull: So, if the plan is that a number of family members will share the vacation property, a mediator is also a useful resource in coming up with the sharing agreement. With the help of a good solicitor as well, these are sort of tools that you can consider in developing this shared ownership arrangement.

Suzana Popovic-Montag: And I know one of the things that we’ve done, Ian, recently in one of our past experiences is we’ve actually used an anonymous process by which we’ve canvassed people in terms of what they would like to happen with the vacation property. And that’s been good in terms of allowing everyone to honestly say what they do or don’t want to happen, and yet not have anyone, you know, stigmatized with that view being attributed directly to them.

Ian Hull: So let’s think about the mechanics of that. How, and I know we’ve done this before, but let’s explain just briefly what…how we’ve sought out that anonymous sort of input. And one of the ways we’ve done it, quite frankly, is through the family meeting process, where we know it’s an issue and we allow in a caucus and not in an open session, discussion about how each one of the individual players wants to deal with the property and not then come back in, and then come back and sort of somehow dovetail to all the various positions and all the various wishes.

Suzana Popovic-Montag:   And that’s made it more easy for individuals to be honest and to get, you know, their positions out there without having someone, you know, staring them across the table and attributing, you know, different thoughts to that desire. And it makes it more easy for people to be comfortable and honest with what they really want to happen.

Ian Hull: And so…alright, we talked early about, you know, briefly about what you need to know about capital gains.  And this is, you know, it’s a Canadian issue.  Certainly in the US, they deal with the tax situation much differently. But across Canada, the capital gains tax on recreational properties can be, as we’ve said earlier, an overwhelming issue. So why don’t we, for our next podcast, begin to sort of analyze in some more detail what we need to know about the capital gains taxes and work through some of this process.

Suzana Popovic-Montag: That’s a great suggestion, Ian, particularly given that, you know, apart from the actual family dynamics of who’s going to get the cottage at the end of the day; this, I would say, is the most…second most important issue that people want to consider.

Ian Hull: Alright, well that’s great.  Thanks so much Suzana.

Suzana Popovic-Montag: Thanks to you 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.