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Listen to Alter Ego Trusts.

This week on Hull on Estates, Natalia and Chris discuss what Alter Ego Trusts are and the pros and cons of using Alter Ego Trusts.

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.

Alter Ego Trusts - Hull on Estates Podcast #107

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.

 

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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Listen to Sham and Secret Trusts.

This week on Hull on estates, Ian and Suzana discuss Sham and Secret Trusts.

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

Sham and Secret Trusts - Hull on Estates Podcast #105

Posted on April 8^th, 2008 by Hull & Hull LLP

 

Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to Episode #105 of our podcast on Tuesday, April 8^th, 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.

 

Ian Hull: Hi Suzana, its Ian Hull here.

 

Suzana Popovic-Montag: Hi and it’s Suzana Popovic-Montag. How are you today?

 

Ian Hull: Just great. We’re celebrating what, 105 now? We haven’t been doing this since 100 so good to be back, good to think about some issues that have been rumbling around in my mind. Just want to remind everyone to feel free to call in to our call-in number at 206-350-6636.

 

Suzana Popovic-Montag: Or you can drop us an e-mail at our gmail address which is hull.lawyers@gmail.com. Or, of course, you can visit us at our blog which is estatelaw.hullandhull.com.

 

Ian Hull: So Suzana, I know that when this launches into the internet, we are going to both actually be out of the country. I’m not going to be as nearly as exotic a spot as you are. But you’re off to Vienna and Prague to test the world markets on estate law and on law generally at a great conference. What your trip triggered in my mind was I thought we might have a discussion today about was issues that have, sort of, a broad and international perspective. And that, of course, ties into trust law generally. Where you’re going, both jurisdictions in Prague, it’ll be slightly different, I think it’s more of a civil code, but the Vienna system as well you’re going to be tied into the – learning a lot about the civil code. But the common law and where to cross the border is governed, trust laws are fairly consistent. And one of the things that they use tremendously in planning in Europe is, of course, trusts to avoid what can be very draconian and overwhelming tax liabilities on death. The classic scenario, certainly in the U.K., that a lot is written about and much case law comes out of, is situations where you create a trust that isn’t really a trust and we call it, of course, sham trusts. Another scenario is, of course, where you might have a situation where you created a secret trust or a semi-secret trust. So I thought it might be fun to talk a little bit about those angles on trust law.  And why don’t we start with the sham trust, if that’s ok.?

 

Suzana Popovic-Montag: That’s great, Ian and I know you’ve written quite a bit on this topic and I think it’s a really interesting one. It doesn’t necessarily – it isn’t necessarily something that we see a lot of but it definitely is something that is on the rise in terms of the literature that’s out there. What a sham trust really is and I guess the best way to, sort of, start with a description of it, is to start with the concept of a bare trust which is a simple trust in that the trustee is a repository of the trust property and he or she or it has no real active management duties to perform.

 

Ian Hull: And, of course, we’re talking about sham trusts, trying to essentially avoid sham trusts because if it is called a sham trust, then CRA and, of course, the Courts won’t give you the protections nor the tax advantages that may or may not exist. So your comment about the bare trust is crucial because that can be a useful and legitimate tool to create a trust relationship. There are, of course, really the opposite to a trust, proper trust with the three certainties or a bare trust as you’re describing, which is a proper trust with the three certainties only with a see-through flow-through in terms of the responsibilities. The opposite would be the sham trust itself. And that’s where the Courts and CRA get a little fussy about it.

 

Suzana Popovic-Montag: And on the face of it, it really does appear to be a trust in the sense that there is a trustee, there is a beneficiary and equitable rights are created in those beneficiaries.

 

Ian Hull: So in a situation where a sham trust has been held by the Court, a trust has been held to be a sham trust and not legitimate for the purposes being sought, is where the Court finds that the only real duty of the trustee is to do what the settlor says. And I know that’s sort of a bit vague but the Courts often go on and say well, you know, they describe these sham trusts as pretend trusts.

 

Suzana Popovic-Montag: And they do that because the common intention of the parties in these kinds of circumstances, the Court will find, is that it was not to actually create a trust with its associated rights and obligations.

 

Ian Hull: And really the Court just gets frustrated and a little cranky with people who create these sort of trust arrangements because they see them as an act or a document that is intended to mislead third parties.

 

Suzana Popovic-Montag: And I know sometimes the cases will actually go so far as to say and I’m just quoting from one of the cases that I am thinking of, that it’s an illusion basically, that it’s calculated to lead the tax collector, i.e. CRA, away from the actual tax payer. And so what it ultimately does is creates this façade of a reality of a trust, when in fact there isn’t one.

 

Ian Hull: Alright, so let’s talking about determining if it is a sham trust and what the Courts will look at.

 

Suzana Popovic-Montag: Well I think the first thing that they start with, of course, is the actual terms of the trust.

 

Ian Hull: And then they tend to talk about it being really a question of control.

 

Suzana Popovic-Montag: And in that sense, you know, it seems to be that they’re looking at whether or not the settlor has maintained control notwithstanding the fact that a trust has, on the face of it, been established.

 

Ian Hull: And one of the tests that I’ve seen in the case law is that the Courts will say, is the trust a mere alter ego of the settlor and that’s all?

 

Suzana Popovic-Montag: Now, Ian, I think we sort of understand the concept of a sham trust.  And what would you say would be sort of a good example of that, that you’ve seen recently or where people would want to try to create these situations and then ultimately not be successful because a Court finds that, in fact, it’s not a valid trust?

 

Ian Hull: Well the classic one that we see in Canada is the off-shore trust. Of course, off-shore trusts can be a good idea, they’re not all sham trusts, for sure. They create excellent tax planning, estate planning and creditor protection availability for wealthy clients. But if it’s not done correctly, you do create the difficulties that a Court from another jurisdiction will be looking through the trust and determining whether or not it is a sham.

 

Suzana Popovic-Montag: And I guess that sort of underscores the importance of working possibly with counsel in the jurisdiction where you’re trying to establish that trust, as well, in order to create something that hopefully will sustain the test by a Court.

 

Ian Hull: And, of course, and you know again, talking about the positives, is these trusts, the bare trusts in particular, can be a useful tool, these off-shore trusts can be useful tools, they create a tremendous amount of ability for wealthy clients to have confidentiality.  And while they have to in Canada, of course, declare their worldwide income, they don’t necessarily have to have it openly documented for others to see what exists and where it exists.

 

Suzana Popovic-Montag: And so there definitely are advantages to it. But what would you say would be a consequence of the fact that it’s a Court or someone who would ultimately determine, I guess CRA, that it isn’t in fact a valid trust?

 

Ian Hull: Well I think the key is, I mean many times these sham trusts are established for tax reasons. But the trust… where the Courts, what the Courts will do is, is that they’ll say, if it is indeed a sham trust, the trust assets are then taxed as if it was in the hands of the settlor. So, you know, any of the advantages that you may have tried to create are lost.

 

Suzana Popovic-Montag: And I guess most importantly, the creditor protection and, I guess, as well the loss of confidentiality to some extent, as well.

 

Ian Hull: For sure and I think that’s  – you know, in many situations, a bit of a deal breaker.

 

Suzana Popovic-Montag: I think if we just spend a couple minutes, we’ve got some time here, Ian, to turn to the concept of secret trusts. And I know I’ve heard you speak about them in the past and you say, you know, what they really amount to is taking the trust concept as we understand it at law and then becoming, you know, agent 007s.

 

Ian Hull: Absolutely. It’s the James Bond trust. And this trust, if done properly, can be a useful tool to again, it doesn’t elude CRA, but it might elude people who want to keep their assets more confidential and it’s an on-shore opportunity and an off-shore.  But it’s an on-shore opportunity to create a situation where the assets transfer from the settlor or a testator, depending if it’s someone who’s passed away, to a beneficiary, but through a third party.

 

Suzana Popovic-Montag: And the advantage there is that, of course, trusts can remain private documents, whereas Wills are potentially very public. And so if you’re trying to create an arrangement where you’re providing for a beneficiary-trustee relationship without it necessarily being known by everyone, you try to create this kind of secret trust arrangement.

 

Ian Hull: That’s right. And I mean, so the client really in this situation wants to make a gift but the nature of that gift they do not want to make public for whatever reason. And I think of an easy illustration was one that I ran into on a case that talked about a situation where the individual had a lot of wealth, wanted to pass on some of that wealth to the child after death, didn’t want the child really – not that the child should know, but didn’t want the public to know just how wealthy that child was going to be, because he feared people would prey on that child and try to take advantage of that child’s financial circumstances.

 

So the steps were to leave it through to a third party, hold it on a secret trust, the terms of which we’ll talk about in a moment here.  But the terms of which are disclosed properly and then the identification of the terms of the trust can, sort of, hold their own.

 

Alright, so we’re just about winding up, but I just want to remind, sort of, when I think about it, I’m reminded of the secret trust because the key is, is that the trust is typically not reduced in writing, the trustee will typically keep the money for him or herself, which obviously creates its own problems, but it is one that you need to have in some way, either through provisions of the Will or some way, articulated what the terms of the trust are.

 

Suzana Popovic-Montag: And that really is the key because this arrangement, by very virtue of the fact that it is a secret one, has to somehow be, as you say, reduced to provide the settlor with as much guarantee or as much protection as possible, in light of the fact that, you know, there are these inherent difficulties with it.

 

Ian Hull: So, in conclusion, you need, sort of, the essential ingredients to pull off a secret trust, is of course, you need a trust with the three certainties.

 

Suzana Popovic-Montag: And you also need an intention of the deceased to actually benefit the secret beneficiaries.

 

Ian Hull: You need communication of the trust terms to the trustee and/or the beneficiary.

 

Suzana Popovic-Montag: And thirdly, you want to have acceptance by the trustee or the beneficiary which is going to be sufficient to actually induce the testator not to execute a Will to that effect.

 

Ian Hull: Terrific. Okay well, thank you very much, Suzana, good to be back on Hull on Estates. Hope that was certainly interesting for me to review these reasonably unique trust questions, but they do pop up from time to time and can be an important part of an estates practice. So I remind everyone to feel free to call in to our call-in number, 206-350-6636.

 

Suzana Popovic-Montag: Or, of course, feel free to send us an e-mail at hull.lawyers@gmail.com or visit our blog and webpage at estatelaw.hullandhull.com. Thanks very much, Ian

 

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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Listen to The Family Conference

This week on Hull on Estates, Natalia and Allan discuss the Family Conference.

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 Estate blog.

 

The Family Conference - Hull on Estates Podcast #96

Posted on February 5^th, 2008 by Hull & Hull LLP

 

Natalia Angelini: Hello and welcome to Hull on Estates. You’re listening to Episode #96 on Tuesday, February 5^th, 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 on Hull on Estates. I’m Natalia Angelini.

 

Allan Socken: Hi and I’m Allan Socken.

 

Natalia Angelini: If you want to be heard on Hull on Estates, you can participate in our discussion by leaving a comment. Give us a call at 206-350-6636. The number is in the show notes along with our e-mail address: hull.lawyers@gmail.com or you can visit our blog at estatelaw.hullandhull.com.

 

So Allan, it’s great to be podcasting with you today. It’s our first time together.

 

Allan Socken: I’m very excited about it, Natalia.

 

Natalia Angelini: That’s good. We’re going to be talking about the family conference. So perhaps I’ll just set out what it is. The family conference is a professionally mediated conference and it essentially provides a forum whereby a testator can reveal his or her proposed estate plan to intended adult beneficiaries. And the objective is to obtain their approval of the plan. So it’s quite a unique animal, the family conference. It’s really the only formal mechanism in place in estate matters where someone can, you know, look their loved ones in the eyes and explain their plan to them, answer any questions about why they wish to have their plans set out in that manner. And ultimately in an ideal scenario, get agreement on it. So Allan, why don’t you tell our listeners what needs to happen in preparation for a conference.

 

Allan Socken: Well before the conference, I think probably the most important question to ask is who do you invite to the conference? And the simple answer is you invite all adults who are involved in the estate plan. At least, at a minimum, the people you invite would be the spouse of the person who made this estate plan as well as his children. And I think in inviting these people, it’s really important that you speak to them and have a candid conversation with them, obviously before the conference, explain the purpose of a conference, namely for all the people to appreciate what the person’s estate plan looks like and the reasons as to why they’re leaving certain gifts the way that they are.

 

Natalia Angelini: And who else can be invited?

 

Allan Socken: Really, any person who has an interest or involvement in the estate plan of the person.

 

Natalia Angelini: Right. And that would even include professionals, like the testator’s estate lawyer, their financial planner or accountant, because they certainly can have a critical role in explaining or answering questions dealing with the assets.

 

Allan Socken: For sure. And I think the other important thing to make mention of is there may be certain circumstances, probably quite frequently, where minor children have an interest in the estate plan. And it’s important to note that minor children should not be included in the family conference. In most jurisdictions, Ontario included, there’s an office known as the Office of the Children’s Lawyer, whose mandate is to protect the interests of minor children. And depending on what the estate plan looks like, it may be necessary to have discussions with them to see if it’s necessary for them to attend the conference as well.

 

Natalia Angelini: That’s a good point, Allan. So are there any other preparatory steps?

 

Allan Socken: The only other thing I’d like to make mention of is the question as to where to hold the family conference. Often people think that it may be prudent to hold it at a family member’s house.  But the reason why, I think, it’s not a good idea is, is often when you go to a person’s house, it may turn into a social function and it may lose the business touch that’s essential in planning for this conference. So I think probably the best place to hold a conference would be at the mediator’s office so people can really appreciate the business-like environment that they’re encountering and the importance placed on the family conference.

 

Natalia Angelini: In addition, it really is like a mediation and you want to be able to have individual caucuses as well as group caucuses. So you need several rooms and breakout rooms and privacy so you can really have it proceed in a meaningful way. So again, I think a mediator’s office or some other kind of office is ideal.

 

Allan Socken: I think moving along, Natalia, now we should address the agenda that’s put in place before the family conference. I think it’s important to stress to our listeners that an agenda is essential to have so that people are aware of what’s going to be taking place at the conference and so that divergence can be avoided as much as possible. So probably what’s important to include in the agenda is really the overview of the person’s estate plan which would include the proposed new Will, who the executor will be, funeral arrangements, debts of the person, taxation issues, guardianship of minor children, who may be the Power of Attorney and dealing with the distribution of specific assets for the estate.

 

Natalia Angelini: Right. I think it is critical to have an agenda and the family conference is chaired. And it’s usually chaired by either the testator or the mediator or someone else selected by the testator. So it’s great assistance to them to have an agenda to follow.

 

Now in respect of how the actual conference works over the course of a day or more than one day, it is much like a mediation.  And, you know, there is, I think, initially, commonly a group meeting where the chairperson goes through the rules of the day. There’s usually a family conference agreement signed which sets out that the mediator is neutral, that he or she is not offering legal advice, that all discussions are without prejudice, and of course, that the mediator is not liable for anything done or omitted at the family conference. So the usual sort of waivers. In addition, a document entitled Rules for Meeting is also signed. And Allan, why don’t you set out what is contained in that document?

 

Allan Socken: Typically for the Rules of the Meeting, it sets out that the parties understand who’s paying for the mediator’s time but not withstanding whoever is paying for the mediator’s time, the mediator still will be neutral throughout the process. As well, the parties agree that they’ll conduct themselves in a business and professional approach. And in that sense, there’ll be no harsh language spoken either at the other parties or the mediator. And believe me, I’m sure Natalia also can attest to the fact she’s seen certain times where discussions can get pretty heated.

 

Natalia Angelini: This is true. This is true. And I think in this kind of conference you really want to encourage views to be shared and grievances to be aired, but at the same time, in order for resolutions to come about, you want to make sure that everything is discussed in a cordial manner.

 

Allan Socken: And just the other thing to make mention of also is one of the rules should also include that all the parties are bound and acknowledge that they’re bound by the Family Conference Agreement. So they can leave whenever they feel like it if they feel progress is not being made. Certainly the mediator will try to keep them there and have the parties agree to at least spend a day there to try to sort things out. But even if the parties want to leave at the end of the day and no agreement can be reached, the parties still agree that all information and all people who were present can’t be subpoenaed in that respect. I think that’s important also to include in the agreement, Natalia.

 

Natalia Angelini: Good point, Allan. So again, it is a fluid process like any other type of mediation and it really can unfold in a different way depending on the parties and the circumstances.  And if an agreement is not ultimately reached at the end of the day, you can, you know, reconvene on another day if all or some of the people are willing to and you can get an agreement at a later time. What that looks like doesn’t necessarily have to be in accordance with the proposed estate plan. It’s not necessarily an imposition of that plan. The plan can be varied or amended pursuant to the comments and views of the beneficiaries and once an agreement is ultimately reached, it’s papered in a document that’s called The Family Constitution. And Allan, maybe you can expand a bit on that.

 

Allan Socken: Sure. Basically, you probably remember from law school, Natalia, that we always talk about the constitution as being a living tree.

 

Natalia Angelini: That’s right. Way back when I do remember.

 

Allan Socken: Well not surprisingly, The Family Constitution is also a living document that requires amendments from time to time. Because as people move on and age in years, no doubt their estate plan changes and when their estate plan changes, it’s really important that The Family Constitution is also updated. And I think as a preamble to The Family Constitution, it’s important to note that while family members may have different views and opinions, they unanimously - hopefully that’s the goal at the end of the day - that they unanimously decide to create this Family Constitution. And I mean, in certain circumstances, there may be family members who don’t want to agree to The Family Constitution or some people may not even want to have the meeting in the first place. So I think the role of the mediator shouldn’t necessarily be to prevent the family conference from going ahead, but perhaps to engage the people who are willing and interested at first to participate in the conference and hopefully, if success can be achieved there, people who didn’t want to participate in the first place may be inclined to give it another look and perhaps be willing to review the constitution that was agreed to. And even in certain circumstances, they may be willing to sign the agreement, albeit they may expect some changes to be made. But at the end of the day, some progress can happen even if not everyone in the family conference is willing at first to participate. And I think that’s important to keep in mind.

 

Natalia Angelini: Right, and one benefit to proceeding even if you don’t have everyone’s consensus is that the process can be of real value because it shows a testator’s clear intention as to how he or she wishes to divide his or her assets, which can really deflate any kind of brewing Will challenge at the end of the day. So litigation avoidance is one real positive potential outcome of the conference. And if you actually do get a Family Constitution signed, then it’s a great thing to have because it includes an agreement not to contest the Will. So that’s a great way to avoid litigation or ultimately if litigation is commenced, to use that document in defence of that.

 

Allan Socken: And just one final point for me to make Natalia, if that’s okay, is probably the most complicated aspect of this family conference is really the need for full disclosure. And for a lot of people, that’s really a difficult thing to do because there may be situations that people are embarrassed to admit or really don’t want to disclose.  For example, extra-marital affairs, not dividing your estate equally among your children.  But at the end of the day, if you want success to be reached with the family conference and you don’t want your Will to be contested or other legal remedies pursued when you die, I really think it’s important that you make mention of these difficult aspects so people can appreciate and they don’t feel as though you’re hiding anything. So while it’s difficult to disclose this information, I really think it’s important to get across that at the end, if you hide it, it will really do more harm than good at the end of the day.

 

Natalia Angelini: That’s right. I mean the fact is this is a delicate process and it’s not one that I think most people are willing to enter into because I think a lot of us would rather not deal with these delicate and difficult issues during our lifetime and we’ll just wait for everyone else to kind of deal with it after we’ve passed on. So I think people need to have, I think in a lot of cases, it helps to sort of have the courage to go ahead with the process and be open and ultimately, in an ideal scenario, get agreement on the issues or at least, you know, canvass them in an open and honest way.

 

So well, I think that brings us to the end of this week’s discussion.  Thanks for listening and thanks for joining me today, Allan.

 

Allan Socken: Thanks Natalia, I had a great time.

 

Natalia Angelini: That’s great. And we look forward to hearing from our listeners. You can send us an email at hull.lawyers@gmail.com or just pick up the phone and leave us a message on our comment line at 206-350-6636. And again, you can also visit our blogs at estatelaw.hullandhull.com, where you’ll even find more information and discussion on today’s practice of estate law. We hope you enjoyed the show. I’m Natalia.

 

Allan Socken: And I’m Allan.

 

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.

 

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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Listen to Estate Assets

This week on Hull on Estates, Natalia Angelini and Sean Graham discuss issues that surround estate assets.  The value of some assets are not always determined by their financial value and the value of other assets may change dramatically over time.

Estate Assets - Hull on Estates Podcast #90

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

 

Natalia Angelini:  Welcome to Hull on Estates.  You’re listening to Sean Graham and Natalia Angelini on Tuesday, December 18^th, 2007 and you’re listening to podcast Episode #90.

 

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.

 

Sean Graham:  Hi Natalia, how are you?

 

Natalia Angelini:  I’m great, Sean.  How are you?

 

Sean Graham:  Oh, pretty good thanks.

 

Natalia Angelini:  That’s good.  I thought we would talk today about assets in the estate planning context.  And so one of the questions that come to my mind is, what kind of considerations does a testator have to take into account when dealing with their assets?

 

Sean Graham:  Well, and it’s kind of a fundamental question which sounds, at first blush, fairly simple.  What do you own?  But I think there’s a bunch of background issues that go into it.  And once we start to talk about some of these issues, at least I was thinking about them when I was doing my blogs this week, it came to my attention that really it can mushroom into a whole bunch of different considerations.  And as we both know, one of the indicia of testamentary capacity is that the testator must know the extent of his or her assets.  So that’s sort of the first step.  You need to know it to do a valid Will, but also knowing the nature and extent of your assets is not always as simple as it may seem, at least in the estate planning context.

 

Natalia Angelini:  So what different assets are there that testators should know about?

 

Sean Graham:  Well, and to some extent, that’s going to depend on what the testator holds dear.  Economic value is not necessarily the only measure of value that goes into a Will.  There may be a painting or a family memoir of some kind that really has no economic value but in some cases, may be the most important asset.  So assets, I think, needs to be considered not only in an economic framework, but also in a sentimental framework.

 

Natalia Angelini:  That’s a good point.  I think in last week’s podcast, David and Allan were talking about probate.  And, of course, one of the things you need to do is value your assets when you’re seeking probate.

 

Sean Graham:  Yeah, and some of those sentimental assets that I just talked about, aren’t going to show up on that application.  But again, in some cases, with some testators, that can actually be more important than the economically valuable assets.  So that’s something I like to look for in any given situation.

 

Now moving on to the economic assets which, in the litigation framework, tends to dominate, although certainly there can be disputes over sentimental things.  Again, this is a possible…this topic really can mushroom.  It’s easy to say sort of off the top of your head what you think is in your bank account and so forth.  But let’s just maybe break it down.  Because each asset, depending on its characteristics and its form of ownership, can really lead to tax issues, litigation issues in terms of who owns something.  It may have an economic and a sentimental value to the testator and also to potential beneficiaries.  So there may be a reason to give an asset to one of the beneficiaries instead of the others.  And really, that’s just the start of it.  So…

 

Natalia Angelini:  Now the obvious largest asset that most people have is their house.  But there’s a whole bunch of others that might not come to mind unless you give some further thought to it.  Why don’t you let us know what some of those are, Sean?

 

Sean Graham:  Well, sure, and the house leads me into sort of real estate, of course.  Not just residences, but people can have multiple residences.  It’s often the case that someone may have bought a residence decades ago.  The price of real estate may have been a relative fraction of what it is today and the testator may have a general idea that real estate values have gone up in the last 50 years.  But they may not know that that house they bought, you know, for, I don’t know, $5,000 in the Forest Hill area and the 5 acres of land on which it sits, are now worth a good deal more than $5,000.  So that’s a situation, obviously that’s an extreme example.  But, you know, there can be very large disparities in values in terms of what a testator who never really wanted to sell the house, never really bothered to check on the market and all of a sudden is talking about giving this house in a Will plan.  It would be helpful certainly to know what the value of that property is.  And, of course, that leads into the issue of well, what happens after the Will is drafted and the value keeps changing?  And that’s why a lot of planners, I think, sort of advise someone to go back to their plan and look at it every few years, because the value of assets change.

 

Natalia Angelini:  That’s right.  I think it’s something always to keep in mind and when you’ve got assets that are local to where you’re residing, it might be more straightforward.  But a lot of people have real estate outside of the country as well.

 

Sean Graham:  And cottages.  I mean, depending on the area, the value of cottages, I understand anyway, can really have changed a great deal.  You know, up in Muskoka, my layperson’s understanding from what I read is that some of the land values have really gone up.  And they might go back down, who knows?  And again, then you’ve got the foreign assets.  Condominium prices for vacation properties in the areas hit by the hurricanes down south a few years ago, you know, who knows what happened to those?  But a testator, you know, it’s a good idea, I think anyway, for a testator to certainly find out.  And it doesn’t hurt to check every once in a while, just to keep yourself updated, whether you’re planning a Will or not, I suppose, just general financial planning.

 

Natalia Angelini:  That’s right.  And once you’re actually administering an estate, that’s going to be relevant at that point again.

 

Sean Graham:  Yeah, and again, the values can change between the time of the Will and the administration of the estate.  I mean, you’re stuck with the Will I suppose.  But you may find that the intentions of the testator sort of may get skewed a bit by changes in values.

 

The other thing I find interesting is those sort of up-in-the-attic personal property, or hanging on the wall, if it’s a painting say, where the family has a basic idea, a family or testator is pretty sure that the painting is valuable.  Say it was done by an artist who rose to prominence after the painting was purchased.  And so the family has a pretty good idea that the painting is worth something but really it’s never been appraised, they’ve never tried to sell it. Those assets can be, it seems to me, very helpful to value, really get a sense of what it’s actually worth.  There could be tax consequences of any assets, and particularly, you know, a valuable painting which was bought for nothing.  And similar to corporate shares, which are bought for nothing and then they skyrocket, but not identical.  You know, there’s different considerations I suspect.  And knowing the value, it seems to me, is the first very important step.

 

Natalia Angelini:  It’s particularly important when you’ve got litigation that’s brewing, because you’re going to want to keep, if you’re the estate trustee, you’re going to want to keep all the beneficiaries and purported beneficiaries aware of what the status of the administration is.  And one of the first things they’re going to want to know is, what all the assets are and what their value is, so they know what they’re fighting over essentially.

 

Sean Graham:  For sure.  And if…let’s just take a hypothetical situation, I’ll pull some names out of mid air.  There’s 3 children:  John, Jenny and Stewart.  There’s a testator who wants to divide up the assets and the testator thinks that John really likes the house and wants the house and Jenny, I think I said, wants the painting, and Stewart gets the rest.  And this is similar to the hypothetical situation I mentioned in my blog.  Again, if you don’t know the values of these different assets, you could be giving John the $2,000,000 house, Jenny the $50,000 painting and Stewart the residue, which is worth $100,000.  But who knows?  Maybe someone is suing the testator so, you know, one of these assets gets eaten up completely.  Without knowing the value and knowing, not just the value, the market value, but also whether there’s claims against an asset, whether it has depreciated or been damaged somehow.  All those things are helpful, in my view, in coming up with a plan.

 

Natalia Angelini:  And the sooner you know this, the better, because if you’re trying to resolve litigation, you’re not going to be able to do it in a meaningful way without knowing what your net dollar value is.

 

Sean Graham:  For sure.  So then you have, of course, the investment assets. And we’re not talking about every kind of asset in this podcast that someone could have.  But investments, portfolios, mutual funds, that sort of thing.  Again, a lot of people I think tend to know the value of these assets because they get statements.  But you don’t get regular statements about your car and you don’t get regular statements about a painting or a house, and so on.  So in many cases at least, I think the investment side of things may be a little easier to figure out.  But you still have background information that’s helpful.  You mainly want to get some tax advice in terms of whether these investments have grown or whether they’re invested in the best, you know, tax manner.  And that can all go into the planning stage as well.

 

Natalia Angelini:  And I think it depends on how sophisticated the testator is and how complex their estate assets are.  But it’s certainly something that, in that kind of scenario, is a good idea, or it’s something I would do in any event.

 

Sean Graham:  And the last thing I’d just sort of want to maybe close on is that you want to come up with a total, I suppose, or some sense of a total value of all these assets once you take into account claims and tax consequences and so forth.  And the total value may affect the amount of beneficiaries.  If an estate is worth $50,000, you may not want…a testator may not want to get too generous to too many people because once all the administration is done, of course, you know, the initial amount may not lend itself to having too much left to give to too many people.  If you’re looking at a $10,000,000 estate and the testator just, for example, might want to take care of the kids “first” and then decide about what other beneficiaries there may be, then who knows.  There may be specific bequests to charities, you know, that would not necessarily be desirable in a smaller estate.

 

Natalia Angelini:  Good point, Sean.

 

Sean Graham:  Well I think…I hope that’s sort of helpful.  Again, we’re just sort of sketching out issues here and the one thing when I think about this topic is a relatively simple question: what do you own? - can lead to an extremely complicated set of follow-up questions and inquiries and so on.  And you may need to go to other people other than the testator, a tax expert, there could be foreign assets, you need to get an opinion from a foreign expert, just to come to that initial question of value.  So I hope that’s helpful to people.

 

Thanks very much, Natalia.

 

Natalia Angelini:  Thanks, Sean.

 

Sean Graham:  So that’s the end of our podcast, and hopefully it’s been some help to people and thanks very much to everyone for listening.

 

Natalia Angelini:  Thanks for listening.  Bye.

 

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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In Ontario, a valid Holograph Will, by definition, is made and signed entirely in the handwriting of the testator. While this sounds simple enough, such documents often invite litigation.

For the person propounding such a Will, the first objective is to prove that the handwriting is that of the alleged testator. Of course, another distinctive feature of a Holograph Will is the absence of witnesses. Proving the identity of the author of a Holograph Will therefore usually requires expert analysis of the handwriting. The expert may encounter difficulties. Rather than writing a Holograph Will in her ordinary handwriting, the testator may have printed the document.

To successfully prove the handwriting of the testator, an expert typically requires several samples of the testator’s signature and writing style. In the absence of such samples (and in the absence of witnesses) it is far from a certainty that the Will can be proved. Further complicating matters is the absence of the original.

While a copy of a Will can be proved in the right circumstances, the absence of witnesses makes it more difficult to prove a copy of a holograph will. On a final note, Holograph Wills frequently give rise to questions of interpretation.

Until next time,

David

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Today, it is quite common for Canadians to own property in the U.S. or other foreign jurisdictions. Having multiple Wills may help protect a testator’s Canadian assets from foreign tax claims, as illustrated in the British Columbia case of Barna Estate (1990), 40 E.T.R. 89 (B.C.S.C.).

In the Barna Estate case, the deceased died owning real property in Europe and substantial personal assets in Canada. The deceased had lived and died in France. She left two Wills. One was a French Will, dealing with her real property in Europe. The second was a Canadian Will, dealing with her cash, bonds and other financial assets in Canada. None of the beneficiaries under either Will were related to the deceased.

Under the applicable French law at the time, beneficiaries not related to the deceased could be liable to pay a 60% tax on the value of the deceased’s worldwide estate.

Canada Trust, the executor named in the Canadian Will, brought an application for the court’s advice as to whether it should pay all debt and succession duties in respect of property passing under both Wills, or whether it should only pay Canadian succession and death duties in respect of property passing under the Canadian Will.

There is a presumption that a testator’s intention is for the law of the jurisdiction in which she resided at the date of execution of a Will shall apply. In this case, the deceased was living in France at the date of execution of the Canadian Will, and according to the presumption, the Will should be interpreted in accordance with French law. However, the presumption is a rebuttable one, and the court ultimately found that the deceased had intended that her Canadian Will be governed by the law of British Columbia.

Once the court decided that the Canadian Will was governed by the law of British Columbia, the court had to interpret the payment of taxes clause in the Canadian Will. Given, among other things, that the deceased’s European property was specifically excluded from the Canadian Will, the court ruled that Canada Trust, as trustee, was only required to pay the death and succession duties in respect of property passing under the Canadian Will.

Have a great day!

Bianca La Neve