Ask an estate lawyer: Victoria Winter on wills, trusts, U.S. citizens and inheritance disputes

 

Putting your affairs in order on paper can be a daunting task. Aside from the emotional aspect of it, there’s much to consider from a legal and financial planning perspective. So it’s not surprising that many Canadians put off drafting their wills and estate plans for as long as possible. But it doesn’t have to be an agonizing experience. Whether your plan is simple or complex, enlisting the help of a professional can help anticipate and avert scenarios that could inflict unnecessary financial hardship or litigation on your heirs at a time when they’re already under duress.

We asked estate lawyer Victoria Winter to share some of her expertise on this subject.

T.E. Wealth: Financial burdens aside, what’s one of the most challenging issues facing beneficiaries when a will is either poorly drafted or not in place at all?

Victoria Winter: Poorly drafted wills are an estate litigator’s dream. The biggest issues with poorly drafted wills are typically a lack of clarity regarding intention or a failure to dispose of all of the assets of the estate. In many cases, this results in the need for additional Court applications, whether that’s an Application for Directions or a dispute among the possible beneficiaries.

Often, the biggest issue when a person passes away without a will is the treatment of beneficiaries who are under the age of majority. The intestacy laws in Ontario dictate how estate assets are to be administered when there is no will. If the deceased had, for example, a spouse and two minor children, the deceased’s assets (other than those held jointly or those with beneficiary designations) would be distributed such that the first $200,000 would go to the spouse and the balance would be divided, with one third going to the spouse and two thirds to the minor children.

When the children are minors, their interests are paid into Court. The surviving spouse (even if he or she is the parent of the minors) does not automatically have the right to hold the assets for the minors, and must make an Application to the Court to be named as the Guardian of Property for them. This can be a time-consuming and costly process. In addition, whether the assets are held by the Court or by a Guardian of Property, the minor is entitled to receive a full distribution at age 18. Typically, this age is much younger than the age that might be designated in a will.

TEW: Some estate planning professionals believe that, in wealthy families, assets should remain in trust for as long as possible for the asset protection and other benefits that a trust can offer. What are your thoughts on this as a means of ensuring the preservation of family assets over generations?

VW: In some cases, these types of trusts work well. However, issues can arise if there is not an appropriate degree of flexibility built into the trust terms to deal with unforeseen circumstances. These circumstances could include beneficiaries moving abroad, a change in tax laws with respect to trusts, the addition of family members who are not biologically related to the family or are adopted and therefore unable to benefit from the trust, and the incapacity or death of the primary trustees. Consideration must also be given to the deemed disposition of the trust assets, which will occur every twenty-one years, as well as the tax consequences of that deemed disposition.

TEW: For U.S. citizens living in Canada, what are the most costly mistakes that you’ve seen people make in their estate plans?

VW: One of the most costly mistakes is not being up-to-date on their U.S. tax filings. Although there may not be any tax owing, the fees to bring the filings up to date after the fact can be significant.

Another issue is the failure to realize that the principal residence exemption we currently enjoy in Canada does not apply to the same extent to a U.S. citizen who resides here. For a U.S. citizen, there are certain restrictions that can result in tax being payable in the U.S. on the sale of a principal Canadian residence which has had a significant gain in value.

TEW: Based on your experience, what is the most common cause of inheritance disputes and how can this be averted?

VW: In my opinion, the most common cause of a will dispute is when a family member is surprised by the terms of the will . In Ontario, generally testators can distribute their estate as they see fit (with certain exceptions for spouse or dependents or contractual obligations). However, if they deviate from an expected distribution (such as to their spouse, or if the spouse is not alive then equally to their children), family members may be disappointed.

I recommend that clients discuss their estate plans with their family members during their lifetime. This does not require handing out copies of the will, but they should ensure that all family members understand how and why the estate is being handled as it is. While this does not guarantee that all disputes will be avoided, it greatly reduces their likelihood.

TEW: Are there significant advantages to using the services of an estate planning practitioner versus an online or DIY plan?

VW: An estate planning practitioner will review all factors that are relevant to an estate plan, such as the type of assets, how and where assets are held, and family circumstances including citizenship, residency, parentage, health and needs. It’s this type of information that permits the most comprehensive plan to be prepared. It also allows testators to structure their estate plan in the most tax-efficient manner possible. An online or DIY plan is typically a simple fill-in-the-blank form that does not take these other considerations into account.

TEW: Keeping in mind that estate laws vary across Canada, what do you see as the biggest threat or change that may be coming to current estate plans?

VW: In the 2017 Budget, the federal government announced consultation this fall on tax planning using private corporations. This includes a review of tax planning where a passive investment portfolio is held inside a private corporation. Any changes in this area will impact individuals who have investment holding companies.

In 2016, we also saw the introduction of changes to the principal residence rules. These changes will impact the ability to access the principal residence exemption where houses are held in certain inter vivos trusts (other than those specifically exempted). This could be, for example, where a trust was set up to hold a residence for a child in order to protect the residence from a spouse in the event of a marriage breakdown. Testamentary trusts that hold interests in a principal residence will also be impacted.

Unless very specific criteria are met, it will not be possible to continue to claim the principal residence exemption for houses held in these trusts. It remains to be seen whether there will be changes to the new rules, but as it currently stands, any existing structures established to hold a principal residence should be reviewed.

Before making any changes to your will or estate plan based on these suggestions, be sure to consult with a lawyer or certified financial planner.

Lucy Conte, T.E. Wealth, Toronto

Victoria Winter is a partner and a senior lawyer in the Trusts and Estate Planning group at Beard Winter LLP. She practises in the areas of estate planning and succession, trusts (domestic, international, Henson), planning for incapacity, estate administration, and charitable giving.

This article was published in T.E. Wealth’s Strategies newsletter, May 2017 edition. Read the full edition here.

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