Gifting Real Estate or Down Payment Fund
By Brian Gillingham
Various news outlets have reported over the past year that parents are giving increasingly large financial contributions to their children to help them get into Canada’s red hot real estate market. These types of transactions often take the form of large cash gifts, but in some cases include outright gifts of homes, vacation properties or vacant land.
While it is important for clients to obtain expert financial planning advice and tax advice to consider the implications these advances will have on their financial plan; we suggest it is also important for clients to consult with their legal advisor to explore the various ways these types of advances can be structured and to consider the implications an advance of this nature will have on their overall estate plan.
Some of these legal considerations include:
- Whether the transaction should be documented as a gift or a forgivable loan?
One of the key considerations is whether the assistance being provided should take the form of a gift or a forgivable loan.
For example, if a child receives a cash gift or gift of real estate from a parent and uses the real estate so acquired as a personal residence, then it may be exposed to spousal claims on the child’s separation in accordance with Ontario’s Family Law Act.
If instead the advance is documented as a bona fide loan, secured by a mortgage and forgiven in the parents’ last will, the real property may not be exposed to spousal claims.
- If the transaction is characterized as a “gift” …
The transaction details should be formalized in a deed of gift signed by the parent and the child. A deed of gift can prevent litigation down the road by confirming the intention of the parent at the time of the transfer (e.g., to rebut the presumption of resulting trust that would otherwise apply to gratuitous transfers) and can also include express language to exclude any income from the transferred property as being included in the child’s “net family property” as provided for in subsection 4(2) of Ontario’s Family Law Act.
- Once you give it away you cannot always take it back…
In the recent case of Hertendy v. Gault the parent learned this lesson the hard way after transferring her house to an adult child for no consideration. The parent continued to live at the residence after the date of the transfer and challenged the legal effect of the transfer a few years later. The Court ruled that the parent intended to make a gift at the time of the transfer and could not rely on the presumption of resulting trust to reverse the transaction. This case certainly supports the proposition that you cannot change your mind after making a gift.
- Thinking of adding a child as a joint owner of a house to avoid probate tax – think again…
In the case of Gully v. Gully a parent added a child as a joint tenant on title to her principal residence. A third-party creditor successfully sued the child for an unrelated matter and registered the judgement against title to the parent’s residence. The parent unsuccessfully tried to remove the judgement from title arguing that she retained a beneficial interest in the entire property and that her son had been put on title as a joint owner for convenience purposes only. The Gully decision demonstrates the risk of holding joint property with children just to save a few dollars in probate tax.
- Equalizing advances made to children
Parents considering these types of advances usually desire to treat their children equally.
A simple solution would be to make a gift of similar value to all of the children at the same time. For example, if a parent with four children wishes to transfer a residence valued at $500,000 to one child, the parent could make a similar cash gift to the other three children. Of course, this simple solution is not always achievable for various reasons.
Another solution would be for the parent to equalize the inheritances of the children in the parent’s last will. This solution can be achieved by implementing a “hotchpot clause”. A hotchpot clause is a special type of clause that can be included in a parent’s will to direct executors to take into account certain advances made to children during the parent’s lifetime when dividing the balance of the parent’s estate assets among the children, and can also be used where the parent has transferred assets to a child by way of a loan and forgives the outstanding balance of the loan in their will.
While there are many reasons why a client may want to make an inter vivos advance, given the various trust, family law, and tax issues that can underpin even the most straight-forward transfer of assets, it is important that clients understand the potential legal consequences of the advance before acting. If any of your clients are considering making an advance of this nature, our team is available to provide support.
“Is my Will really public knowledge?” Lessons from Sherman Estate and your options when it comes to privacy
By Alexandra Manthorpe
The saga of the murders of prominent couple Barry and Honey Sherman has captivated Canadians and generated substantial media coverage since their bodies were discovered in their Toronto home back in December 2017.
The real life “whodunnit” again made the news again in December 2021 when police released a video of a possible suspect. Much ink was also spilled in June 2021 when the Supreme Court of Canada released its decision in Sherman Estate v. Donovan (2021 SCC 25). As of early January 2022, no one has been charged with any crime, so what matter was heard by the Supreme Court? Put simply, whether or not the Shermans’ Wills could become publicly available.
Depending on the circumstances, an Executor (an “Estate Trustee”) often requires “probate” (now called a “Certificate of Appointment”) in order to collect and distribute property belonging to the deceased person at issue. A Certificate of Appointment is basically court confirmation that the person named therein as Estate Trustee does indeed have authority to deal with the deceased’s assets, thereby allowing third parties like financial institutions to release those assets to the named Estate Trustee. A copy of the Will, if there is one, is attached to the Certificate of Appointment.
In Sherman Estate, the application judge who first heard the matter agreed with the Shermans’ Estate Trustees’ unusual request to have the Certificate of Appointment files sealed. Sealing orders for estate administration matters are rare. However, the Estate Trustees stated that they “hoped to see to the orderly transfer of the couple’s property, at arm’s length from…the public’s morbid interest in the unexplained deaths and the curiosity around apparently great sums of money involved.” As such, they persuaded the application judge that any harmful effects of sealing the files (which effectively served as a publication ban) were outweighed by the privacy and physical safety interests of the beneficiaries.
Reporter Kevin Donovan, who covered the Sherman murders extensively, and his employer, the Toronto Star newspaper, disagreed with the sealing order and appealed. They argued that “the orders violated [their] constitutional rights of freedom of expression and freedom of the press, as well as the attending principle that the workings of the courts should be open to the public as a means of guaranteeing the fair and transparent administration of justice.” The Ontario Court of Appeal sided with Donovan et al, so not surprisingly, the matter was appealed once more.
The Supreme Court agreed with the Ontario Court of Appeal. In a unanimous decision, Justice Kasirer held that, “Court openness is protected by the constitutional guarantee of freedom of expression and is essential to the proper functioning of our democracy…Reporting on court proceedings by a free press is often said to be inseparable from the principle of open justice…Limits on openness in service of other public interests have been recognized, but sparingly and always with an eye to preserving a strong presumption that justice should proceed in public view…The test for discretionary limits on court openness is directed at maintaining this presumption while offering sufficient flexibility for courts to protect these other public interests where they arise.”
He continued: “The right of privacy is not absolute; the open court principle is not without exceptions…I disagree with the [Estate] Trustees that the ostensibly unbounded privacy interest they invoke qualifies as an important public interest…Their broad claim fails to focus on the elements of privacy that are deserving of public protection in the open court context…[However] a court can make an exception to the open court principle, notwithstanding the strong presumption in its favour, if the interest in protecting core aspects of individuals’ personal lives that bear on their dignity is at serious risk by reason of the dissemination of sufficiently sensitive information. The question is not whether the information is ‘personal’ to the individual concerned, but whether, because of its highly sensitive character, its dissemination would occasion an affront to their dignity that society as a whole has a stake in protecting.”
So what “affront to dignity” is required? Justice Kasirer explained: “This public interest in privacy appropriately focuses the analysis on the impact of the dissemination of sensitive personal information, rather than the mere fact of this dissemination, which is frequently risked in court proceedings and is necessary in a system that privileges court openness. It is a high bar — higher and more precise than the sweeping privacy interest relied upon here by the [Estate] Trustees. This public interest will only be seriously at risk where the information in question strikes at what is sometimes said to be the core identity of the individual concerned: information so sensitive that its dissemination could be an affront to dignity that the public would not tolerate, even in service of open proceedings.” For example, this could include revealing someone’s sexual orientation or gender identity without their consent.
Analyzing the situation before him, he held that, “In the present case, the information in the court files was not of this highly sensitive character that it could be said to strike at the core identity of the affected persons [i.e. the beneficiaries]; the [Estate] Trustees have failed to show how the lifting of the sealing orders engages the dignity of the affected individuals. I am therefore not convinced that the intrusion on their privacy raises a serious risk to an important public interest. Moreover…there was no serious risk of physical harm to the affected individuals by lifting the sealing orders. Accordingly, this is not an appropriate case in which to make sealing orders, or any order limiting access to these court files.”
To those of us practising in Wills & Estates, the Sherman Estate decision was not really a surprise. Yes, matters involving Certificates of Appointment, including the contents of deceased persons’ Wills, can become public knowledge under the “open courts” principle, and courts will rarely grant exceptions. But the reality is most Wills do essentially remain “private” within family and friends: Why would anyone who is not a beneficiary or expecting to be named as a beneficiary want to see a Will? Most people – even “nosy neighbours” – do not make the effort to go down to the local courthouse to view a deceased person’s Will unless there’s a compelling reason for them to do so, as perhaps Kevin Donovan felt there was, given his extensive writings into Sherman family affairs.
Interestingly, Barry Sherman’s Will which did end up becoming “public” was likely not even his most revealing one! Since the mid-1990s, many business owners – especially those with incredibly valuable holdings like Barry – have created two Wills for themselves: One Will for their “probate” assets (and which risks becoming public knowledge), and a separate Will which generally remains private for their “non-probate” assets, including interests in privately-held business corporations. While multiple Will planning is usually done to minimize estate administration tax (probate tax) on death, it does have privacy advantages as well. It was well-established before his death that Barry was one of Canada’s richest men, a billionaire, with a large business empire. However, his secondary / “non-probate” / business Will is likely to remain beyond the reach of reporters and the public’s prying eyes.
Honey Sherman appears to have died “intestate” (without a Will), which in my view is perhaps the biggest surprise in this whole matter! Given her high net worth (even if lower than Barry’s), I would have expected her to have even just a simple Will. If you die without a Will, no one has an automatic right to administer your estate (unlike with a Will, in which an Estate Trustee is usually appointed), so intestacies often result in someone having to obtain a Certificate of Appointment.
Certain estate planning techniques, including the multiple Will strategy outlined above, can help people who are concerned about privacy and confidentiality. Another option to explore, especially if you are age 65 or older, is trust planning, specifically having an Alter Ego Trust or a Joint Spousal Trust (also called a Joint Partner Trust). An Alter Ego Trust or Joint Spousal Trust can serve in some ways as a Will substitute. Unlike a Will, for which a Certificate of Appointment may be required, the Trust Deed for an Alter Ego Trust or Joint Spousal Trust can often remain totally private, since court involvement is generally not required.
If you would like to learn more about what estate planning may be appropriate for your situation, particularly if privacy and confidentiality are big concerns, then please reach out to one of our Wills & Estates team members today.
Resulting Trusts and Beneficiary Designations
By Ryan MacNeil
In March 2020, the Ontario Superior Court of Justice released its decision in Calmusky v Calmusky, which applied the presumption of resulting trust to the designation of a Registered Retirement Income Fund (RRIF). The effect of this decision was to override the designation of the RRIF, such that the beneficiary did not hold the funds for himself, but rather held the funds for the benefit of the deceased RRIF holder’s estate.
The decision surprised many in the estate planning sector who were concerned the decision created ambiguity around the beneficial ownership of RRIFs and would lead to increased disputes among family members, particularly where the RRIF beneficiary and estate beneficiaries were different.
This past summer, the application of the presumption of resulting trust to RRIFs was again at issue in the case of Mak (Estate) v. Mak. In that case, the deceased mother designated one of her four sons as the beneficiary of her RRIF, and the three other siblings, relying on the Calmusky decision, commenced an action against the RRIF beneficiary claiming he held the proceeds of the RRIF for the benefit of the estate, which was divided equally among the four siblings under the mother’s will.
Ultimately, Justice McKelvey of the Ontario Superior Court of Justice found that the presumption of resulting trust did not apply to a RRIF designation for the following reasons:
- The presumption applies to inter vivos gratuitous transfers and a beneficiary designation is not an inter vivos transfer;
- The Succession Law Reform Act (SLRA) explicitly permits the designation of “plans” which includes RRIFs, and requires the RRIF holding institution to pay out the funds to the beneficiary named in the plan; and
- The entire point of a beneficiary designation is to state who will receive the proceeds of the plan on the holder’s death.
For Justice McKelvey, the motivations for adding an adult child to a joint bank account (and the relationship created by such a transfer) differed substantially from the motivation to designate a person as the beneficiary of a RRIF, such that the presumption of resulting trust should not apply to a RRIF beneficiary designation.
The Mak Estate decision was issued by the same level of court as the Calmusky decision, so it does not override the decision; however, Justice McKelvey’s reasoning is highly persuasive and suggests the Calmusky decision may be an outlier rather than a new legal norm.
Ontario Court of Appeal revisits, and confirms, test for capacity to marry in recent case
By Claire Kadwell
The test for capacity to marry continues to be revisited by the courts as an emerging issue that intersects family law, estates law, and elder law. Many cases have similar facts where an elderly person has married someone much younger, and their adult children have concerns about the validity of the marriage (and the effects on the elderly person’s estate plan). As stated by Justice Mandhane in the recent case of Tanti v Tanti et al, in these situations the courts are asked to balance the autonomy of elderly persons against vulnerability that can come with age or disability.
In the case of Tanti, Raymond challenged the validity of the marriage of his father Paul, to Paul’s “much younger, live-in companion” Sharon on the grounds that Paul did not have the requisite capacity to marry Sharon. On appeal, the Ontario Court of Appeal confirmed that the correct test to be applied is whether the parties understood “the nature of the marriage contract and the duties and responsibilities that flow from it.” The analysis must be situation specific, and, departing from previous cases, it does not matter whether someone is also incapable of managing property. In finding that the marriage of Paul and Sharon was valid, the court considered factors such as Paul’s interactions with other professionals prior to the marriage, his capacity before and immediately after the marriage ceremony, Paul’s understanding of the ceremony and vows, and, importantly, Paul and Sharon’s relationship prior to the wedding.
Martial status has important implications for estate planning, but less so since January 1, 2022. As part of the Bill 245, Accelerating Access to Justice Act, 2021, which came into effect on January 1, 2022, marriage no longer revokes a Will. A marriage later in life will not therefore necessarily change someone’s previously made estate plan. However, a marriage is relevant where someone has not executed a Will and their estate is distributed in accordance with the rules of intestacy in accordance with the Succession Law Reform Act.
The following update is for educational purposes only, not to provide specific legal advice. Should you have any questions, please do not hesitate to contact us by phone at 613-544-0211 or by email at [email protected].