Craig Vander Zee and Bianca La Neve discuss variation of trusts, with an emphasis on the Variation of Trusts Act and approval of variations of trusts on behalf of minor, unascertained, unborn or contingent beneficiaries.  The well-known case of R. v. Irving (1975), 11. O.R. (2d) 42 (H.C.) is discussed.

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.

Variation of Trusts - Hull on Estates Podcast #127

Posted on September 9^th, 2008 by Hull & Hull LLP

Bianca La Neve: Hello and welcome to Hull on Estates. You’re listening to Episode #127 on Tuesday, September 9^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.

Craig Vander Zee:  Good morning, Bianca, how are you?

Bianca La Neve: Good, how are you, Craig?

Craig Vander Zee: Very well, thank you. It’s nice to have you back here full-time back in the office after being away with your little guy.

Bianca La Neve: Thank you.

Craig Vander Zee: And it’s a pleasure to be podcasting with you today.

Bianca La Neve: It is, it is a pleasure. How was your long weekend?

Craig Vander Zee: Pretty much filled with championship baseball and soccer. The baseball was Saturday, so six hours on the diamond on Saturday for my little guy, and my little girl played in the rain for three separate games on the Sunday. But they had a blast and it was a good weekend.

Bianca La Neve: Great. So, today Craig, I thought we’d talk about variation of trusts. So in starting our discussion of variation of trusts, I think, Craig, the first step is always to look at your trust document. It’s really important to go back to basics, take a look at what the trust document says, its wording, and from there decide on what your next steps are. And those can be?

Craig Vander Zee: Well, I mean, first of all just piggybacking on that, you need to look at, it could be a testamentary trust arising out of a Will, it could be by way of settlement, it could be by other disposition.  So you need to understand the trust document and the exact wording of the document. It may be that what you really need is an interpretation of a section in the trust, or opinion, advice and direction of the court. But if those have been considered and it’s truly a variation of the trust, then when you’re considering how you want to go about it, you look towards the Variation of Trusts Act.  And when I say how you’re going to go about it, it could be that the variation arises just due to a single issue in the trust; it could be tax reasons or the trust doesn’t provide in a manner that it should, it doesn’t allow for an encroachment and everyone believes in the situation that an encroachment is absolutely appropriate and proper and consented by everyone. But it could also arise from Minutes of Settlement dealing from another procedure, such as a passing of accounts which was contested and as a result, that involves a trust, and as a result the settlement may contemplate a variation of the trust.  Obviously, that would have to be done pursuant to the Act and in consideration of the case law criteria.

Bianca La Neve: So it’s important to know that a variation of trust can be a stand-alone procedure, or proceeding, or it can be ancillary to some broader relief sought, like you had, your passing of accounts or approval of a settlement.

Craig Vander Zee: And that’s right, and even if it is piggybacking if you will, on another settlement or another proceeding, you still would bring the application itself. You still do need to bring the application under the Variation of Trusts Act. And the size of the Act or the length of the Act is quite surprising, it’s only one section in length and we shouldn’t let the length of it fool you, because we simply can’t ignore it.

Bianca La Neve: So essentially the Act permits the Court to approve a variation of a trust, whether it be under a Will, a settlement or other disposition, and allows the Court to approve it on behalf of minor, unascertained, unborn or contingent beneficiaries if the variation in the words of the Act appears to be for the benefit of those persons.

Craig Vander Zee: Well in relying on the Act for the jurisdiction to go ahead with it, there are many things to consider in pursuing the variation such as the procedure to follow and the criteria to be met for the variation to be allowed by the Court.

Bianca La Neve: Now, Craig, there is that well-known case, R. v. Irving which sets out essentially the three criteria that a Court considers in determining whether to approve the variation.

Craig Vander Zee: Yeah, and those are in summary, does the variation keep alive the basic intention of the testator or the settler? Does the variation benefit those for whom the Court is asked to consent? And then whether, and this is sort of the legal jargon, but whether a prudent adult motivated by intelligent self-interest and sustained consideration of the expectancies and risks of the variation, would likely accept it. So you first consider, who does the variation need to be done on the behalf of and then you look to those criteria.  And for the purposes of today, Bianca, we won’t be getting into the case law that have considered those criteria, because there’s certainly debate as to the importance of each of those specific criteria and how they would apply to different situations, that is, different factual situations. So we’ll leave that for a different day.  But what I thought we could focus on today, for the remainder of our session is, looking at the representation of the incapacitated beneficiaries and then touching upon briefly, the procedure. 

So essentially then, with minors, the Children’s Lawyer in a trust scenario where the minor as a respondent is going to be the representative and we’ll act as the litigation guardian for the purposes of the variation of the trust. And then we can also look at unborn and unascertained beneficiaries as well.

Bianca La Neve: And Rule 10.01(1) authorizes the Court to appoint a person to represent these interests. This is also known as a representation order. Now although Rule 10 doesn’t specifically refer to the Children’s Lawyer, Courts have traditionally appointed the Children’s Lawyer to represent this class of beneficiaries.

Craig Vander Zee: And again, when dealing with the Notice of Application that’s necessary for a variation, the Notice of Application should specifically request such a representation order in this particular circumstance.  And it may very well be that the order is sought for the Children’s Lawyer to represent all minor, unborn and unascertained beneficiaries to cover the global category of those beneficiaries. 

And then I guess lastly, Bianca, we should touch upon those beneficiaries that are mentally incapable persons or absentees.

Bianca La Neve: In the case of a mentally incapable person or absentee, where there is already a person that has the authority to act as their litigation guardian, attorney or committee, such person usually acts as their litigation guardian in these variation of trust applications, unless the Court orders otherwise. If there is no person that has the legal authority to protect the interests of the mentally incapable person or the absentee, and there is no suitable person willing to act, then the order that should be sought is appointing the Public Guardian and Trustee.

Craig Vander Zee: Well and that’s right. And I think, given the amount of time, if we’ve dealt with the representation aspect, obviously those who don’t fall into those categories, beneficiaries who are adults and who are capable, certainly ought to seek independent legal advice as well. But they are capable of obtaining that representation and what we were really touching upon were those who the Court and in law don’t see as being capable and as such, need these types of representation orders or types of representation.  And so I think given the balance of the time, we’ll just touch upon the documents that would be required for a variation.

Bianca La Neve: So the first document you need is the Notice of Application. The Application is brought in the Ontario Court General Division so in your Notice of Application the relief you are seeking is approval of the variation on behalf of the incapacitated beneficiaries.

Craig Vander Zee: And when you’re dealing with the beneficiaries, that’s whether they’re vested or contingent beneficiaries.  And while the Notice of Application is certainly the first document in the Application record, perhaps the most important document in the Application record is the deed of arrangement itself. And the deed of arrangement will set out what the terms of the variation are intended to be.  And that is well, that is being requested to be approved by the Court and is to be executed by all of those beneficiaries that have capacity. So it may also be the case that the trustees sign the deed of arrangement as well. And aside from the deed of arrangement, there would be an Affidavit that will set out what is often in the recitals of the deed of arrangement in terms of the facts in putting that before the Court so the Court can understand the situation of how it arises, and that it is in the best interests of those who the Court is asking to approve it on behalf of. And then there’s a Factum and it may very well be that a Factum isn’t necessary, that leave can be sought, that the Factum not be necessary.  And that is typical in situations where there is Minutes of Settlement arising from a proceeding and the variation is part of that proceeding, albeit an application unto itself, but that it’s clear to the Court how this variation arises. 

And then obviously there’s a draft judgment that would be circulated amongst the parties so that everybody is on notice as to what the terms of the judgment are going to be. And I think that does it for us today, Bianca.

Bianca La Neve: So thank you for listening to our discussion on variation of trusts. As always, we look forward to hearing from our listeners. You may send us an e-mail at hull.lawyers@gmail.com or leave us a message on our comment line, area code 206-350-6636 and be sure to visit our blog post daily at estatelaw.hullandhull.com.

Craig Vander Zee: Thanks very much, Bianca and I look forward to the next opportunity to podcast with you.

Bianca La Neve: Thanks, Craig.

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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Essentially, the Act permits the Court to approve a variation of a trust under a will, settlement or other disposition on behalf of minor, unascertained, unborn or contingent beneficiaries if the variation, in the words of the Act, “appears to be for the benefit” of those persons.

While relying on the Act for jurisdiction to make a variation, there are many things to consider in pursuing a variation such as the procedure to follow and the criteria to meet in order to have the variation approved. 

In the well-known case of R v. Irving, (1975), 11 O.R. (2d) 442 (H.C.), the Court set out three criteria to consider in determining whether to approve a variation, namely: (i) does the variation keep alive the basic intention of the testator or settler?, (ii) does the variation benefit those for whom the Court is asked to consent?, and (iii) whether a prudent adult motivated by intelligent self-interest and sustained consideration of the expectancies and risks of the variation, would likely accept it?

There are a number of cases that have considered these criteria; too many to go into in this blog. Suffice it to say that the Act does provide an answer to the question as to whether one can vary a trust, but the answer is only a partial one as the Court will also consider criteria needed to be met in determining whether to approve a variation.

Enjoy the long weekend (and last of the summer), school starts next Tuesday.

Craig

Posted on November 6^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #85 of our podcast on Tuesday, November 6^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.

Ian Hull:  So we’ve survived Halloween.

Suzana Popovic-Montag:  We have.  Did you have fun?

Ian Hull:  More food for me not to eat.

Well, we had a good discussion last podcast about deferring tax on capital gains and dealing with those sort of fundamental planning issues.  Let’s…I think we might, but why don’t we spend a few minutes winding up on that issue a little bit and then talking a little bit about some drafting issues if we have time.

Suzana Popovic-Montag:  That’s a great idea, Ian.  Because we were just getting into, you know, different ways that a spousal trust could be tainted and what the consequences of that were.  And one of the things we pointed out was that in these situations, you wouldn’t have any rollover available to the estate.

Ian Hull:  So this whole rollover idea is our great deferring step and there’s this whole theory of tax planning with estates, but with everything and that is, is that even if you have to pay the tax, let’s wait to the very last moment in time to pay it.  So husband wife, happily married, one of the spouses dies before the other.  That spouse doesn’t have to pay tax if you roll it over to the surviving spouse and you’re essentially deferring it.  You’re not avoiding the tax, which is important.  But it’s deferring it.  And there’s a cost to deferring it.  In this case we talked about is that we’re putting it into a trust.  So there’s a certain lack of control.  You’re not giving it all to the surviving spouse.  Or you can have rollover available when you give it to the person 100%.  Like, for example, you would rollover your house.  It might be held in joint tenancy or you pass it on pursuant to your Will to your spouse.  There’s a rollover in that sense.  Full control to that surviving spouse.  That surviving spouse can do with that asset as they see fit.  But when you put it into a trust, you lose control and therefore Revenue Canada says, or CRA now, says wait a minute, if you’re going to keep…take advantage of this trust arrangement, we’re not going to let you make it go to anybody, or allow any income in that trust to anyone other than the surviving spouse.

Suzana Popovic-Montag:  One of the neat things that does arise in some situations, Ian, is where you, even though a spousal trust has somehow become tainted, it may be possible to untaint the trust.

Ian Hull:  Yeah, and that’s a very…certainly from our perspective, when we do this kind of work in the litigation side, it’s a dangerous game.  We tend to tell our clients that the cleaning of the trust is not a guarantee and ultimately CRA may have some difficulties with it.  And a classic scenario was, years ago, they used to have in the trusts the ability to borrow and if the language wasn’t perfectly drafted, CRA used to say that that was a tainted trust.  And we went into Court and tried to cleanse those trusts.  But we would have to say to our client that the cleansing from a Court Order doesn’t necessarily bind CRA.  So you left yourself exposed.  So you really want to try to avoid the cleaning if you can help it, but it is, you’re so right, available.  And it’s not the end game if the trust has been tainted or made dirty, so to speak.

Suzana Popovic-Montag:  Now another thing that I try to keep in mind when I’m speaking with clients is the fact that a rollover can be available on transfers to either a spouse directly or to a spousal trust that may arise as a result of a disclaimer by a beneficiary of the estate or a release or a surrender by a beneficiary, who’s other than the spouse of a deceased.

Ian Hull:  That’s right.  And there’s also transfers that are available as a result of a variation of the trust application.  There’s an Act in Ontario and throughout Canada, the Variations of Trust Act, that allows for a variation or amendment to the trust.  Dependent’s relief claims can also allow for this.  So there are some, as you talked about earlier, there’s ways to cleanse the trust.  There are some creative angles that are available, what we call post-mortem as well, after death, to help enjoy some of these important rollover benefits.

Suzana Popovic-Montag:  Now Ian, let’s turn perhaps to just a brief discussion about what happens then on the death of that second spouse, once that rollover has expired, so to speak.

Ian Hull:  Yeah.  Well, that’s the day of reckoning and lots of people try to avoid it.  Even on that day of reckoning, depending on how you set it up, there is some wiggle room.  But the basic rule is, is that tax on capital gains becomes payable on the disposition by that spouse or by that spousal trust, however it’s been established.

Suzana Popovic-Montag:  And so there’s a deemed realization of the capital property that’s in that spousal trust on the death of the survivor or if that survivor then transfers it to someone else other than the spouse.

Ian Hull:  That’s right.  So we…finally CRA gets their money.

Suzana Popovic-Montag:  isn’t that always the case?

Ian Hull:  That’s right.

Just a comment, and we don’t pretend to be the drafting experts nor wanting to, in the podcast format, deal too much with the drafting issues.  But we talked about some of the answers that can get through the Court system if there are problems with the trust itself.  But why don’t we spend a couple of minutes just on drafting issues, to help maximize or help make sure this deferral is effective.

Suzana Popovic-Montag:  One of the things that sort of comes to mind in that situation, Ian, is where we’ve got a testator who decides to require some kind of remarriage clause, or wishes to include in his or her Will the ability to sprinkle income amongst the spouse and the children.

Ian Hull:  So, in a sense, there is someone who…the spouse is dying, and has died, and has created a document, a Will, that is tainted, so to speak, and wants to be tainted.

Suzana Popovic-Montag:  Right.  So they’re doing both a tainted and an untainted trust, is the way that I sort of think of it as.

Ian Hull:  That’s right.  And so we establish one or more spousal trusts, or one or more trusts that qualify as a spousal trust, and we also establish what might be a testamentary trust.  And a classic estate planning technique in that scenario is, and has been used for many years, and it’s not perfect for everyone, but there is a classic estate scenario when we set up these various trusts.

Suzana Popovic-Montag:  And I guess the idea really is to allow, in the untainted trust, you know, what we talked about in allowing for that rollover provision, but recognizing the fact that, you know, not every asset can be put into that kind of arrangement.  And so allowing a trustee or an executor the discretion to allocate the assets of the estate between the tainted and the non-tainted spousal trust.

Ian Hull:  And what will happen is, is that literally the Will will provide that trusts are to be established.  And the classic scenario is, we call it the kid’s trust and the spousal trust.  And the executors are told in the Will that they have to, on the date of death or the day after the date of death, whenever the trigger point is, they have to sit down and decide how much money is there and what would be the most appropriate.  So if there is a $500,000 estate, would you put all of that money into the spousal trust?  Would you put half of that money into the spousal trust, and the other half into the children’s trust?  Those are the kind of questions that you would have to push on to the executors to make that decision.

Suzana Popovic-Montag:  And I imagine they would be getting legal accounting tax advice in order to determine which assets, you know, for instance, had the greatest capital gain or recapture, that they’d want to allocate specifically to the qualifying spousal trust, and which they would put elsewhere, in order to actually maximize that deferral of tax for as long as possible.

Ian Hull:  That’s right.  Now that’s all well and good in theory, but we’ve talked about problems that get created.  And one of them is, of course, that the children or the spouse feels that they are not being treated properly.  And the executors have the curse of trying to make the decision of how much goes in the trust.  But they also have the legal curse around them in the sense that the surviving spouse has special rights.  So you can’t just give, for example on that $500,000 example, you can’t just say, let’s just willy nilly split it 50/50 for example, $250,000 to the kid’s trust and $250,000 to the spousal trust, because of the super-priority, so to speak, that the spouse has.

Suzana Popovic-Montag:  And I imagine you’re referring, Ian, to the right of the spouse to elect under, in Ontario, the Family Law Act.  Something that we’ve talked about in the past, just the entitlement of a surviving spouse, to say notwithstanding the terms of the Will, I’m actually going to elect to take half of the value of the estate.  And there’s a calculation that’s involved in that.  But that being sort of the big idea.

Ian Hull:  That’s right.  And it’s the community of property analysis that everybody whose married to another spouse for a long period of time, and what long means is always debated in the Courts.  But if you have a lengthy relationship, and it’s a married relationship, the Courts across Canada and in the United States say there is a community of property here.  So notwithstanding what the executors want to do, you have an override clause, so to speak.  And you also have many other claims that are available…not many…but I mean several other claims that are available to a surviving spouse in different jurisdictions.  So it seems to me that this, coming back to one of our important themes, is this is where you want to have some discussion before you die with your executors, with your family, to determine (a) does the two trust arrangement make sense and (b) how would, what would be a realistic and reasonable allocation of whatever money is left.

Suzana Popovic-Montag:  And I think tempering all of that, of course, with the recognition that despite all this wonderful planning and what the intention is, that at the end of the day, if a spouse chooses to, he or she can completely ignore that and pursue other remedies.

Ian Hull:  Absolutely.

Alright, well I think that’s a good start. What we might do in the next podcast is talk a little bit more about some capital gains issues and some of the family law issues that tie into that.  But we’ll also want to focus our attention away from the spousal trust arrangement into the testamentary trust, because in estate planning, the two core trust arrangements are, one is the spousal trust, and the other is a testamentary trust.  So I think we need to spend some time on that.  But we also need to wrap up some more of our considerations with the super-priority of the surviving spouse.

Suzana Popovic-Montag:  That’s great, Ian.  I look forward to our next podcast.

Ian Hull:  Thanks a lot, Suzana.

Suzana Popovic-Montag:  Thanks to 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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