Month: May 2020

Executor personally liable for estate taxes; beneficiaries not obligated to return estate monies to indemnify

May 29, 2020

Beneficiaries generally want to receive their shares of the estate as soon as possible. Executors may feel pressured by beneficiaries to distribute estate assets prematurely, before all of the estate liabilities have been confirmed and paid. In particular, it often takes time to determine the final tax liabilities of the deceased person and their estate, and obtain clearance certificates from the Canada Revenue Agency confirming that no further taxes are owing. As executor, you may be considering payout of estate assets prior to obtaining a clearance certificate, perhaps with a holdback which you intend to apply to any outstanding tax (or other) liabilities as they arise.

There is a risk to this. Section 159 of the Income Tax Act requires that a personal representative obtain a clearance certificate before distribution of an estate and imposes personal liability for the tax liability of the estate on a personal representative who does not do so.

In Muth Estate, 2019 ABQB 922, the executor held back funds for income tax obligations of the estate and then distributed the balance to herself and the other beneficiaries. The holdback turned out to be less than what the estate owed to CRA (calculated by the executor at approximately $24,000), and the executor sought reimbursement from the beneficiaries of their proportionate shares.  Her estimate for the amount of the holdback was based on advice from an accountant that turned out to be incorrect.

If a trustee is seeking indemnity from the beneficiaries, such an indemnity may be available when the beneficiaries instigated or requested that the payment to the beneficiaries be made. However, it follows that if the beneficiaries did not instigate or request the payout with an insufficient holdback (i.e. the trustee/executor made their own decision to payout the monies), then the beneficiaries cannot be obligated to indemnify the trustee.

In Muth Estate, the Court concluded that the other beneficiaries were under no obligation to indemnify the executor for income tax or penalties imposed as a result of her failure to obtain a clearance certificate before distributing the estate.  The executor was personally liable for the tax liability.

This should serve as warning to executors to not be pressured by beneficiaries (even if they are family!) to distribute assets before it is appropriate to do so, or without adequate holdback or security, such as indemnity agreements signed by all of the beneficiaries.

Power of attorney abuse discovered after death: what can a beneficiary do about it?

May 19, 2020

We are often contacted by beneficiaries who have become aware of actions taken by the person managing the deceased’s affairs under a power of attorney which have diminished the value of the deceased’s estate. The attorney may have transferred some of the deceased’s assets into their own name (solely or jointly with the deceased) or into the names of others.  The attorney may have spent the deceased’s monies or property for their own benefit.  This has occurred without the knowledge of the beneficiaries, and only comes to light after the deceased’s death, when the deceased’s estate is much less than expected or is missing certain assets. What options are available to a beneficiary who seeks to investigate or commence an action against the attorney of a deceased person?

There is often a further complicating factor: the attorney under suspicion may also be the person named as the executor of the estate. An executor has a duty to shepherd estate property and commence appropriate claims against any third parties in possession of estate property.  If the executor was also the attorney, this would require an executor to investigate their own conduct as attorney.  This is an obvious conflict of interest.

Even if the executor is not the attorney, the executor may still refuse to take action against the attorney. The executor may believe that the claim against the attorney has no merit, or the expense to pursue the claim is unreasonable or an unnecessary risk. What happens when a beneficiary wants a claim to be pursued against the attorney, but the executor, on behalf of the estate, refuses to pursue that claim?

In Mortimer v. Bender 2020 BCSC 483, a beneficiary sought to solve this problem by arguing that an attorney of a now-deceased person owes fiduciary duties to the beneficiaries of that deceased’s person’s estate.  As a result, it was argued that the beneficiary had standing to bring her own claim against the attorney.  The court did not agree.  An attorney is obliged to account only to the donor who gave the power of attorney while they were alive.  Once the donor is dead, the attorney is obliged to account only to the donor’s estate.  A beneficiary lacks standing to allege breach of fiduciary duty by the deceased’s attorney or seek a declaration of resulting trust in favor of the estate. The court also did not agree that there was an exception to an executor’s exclusive statutory authority to commence proceedings on behalf of an estate, when the would-be defendant is the personal representative.

As a result, a beneficiary who believes that the estate has a claim against its executor (or some other person) cannot simply bring that claim in their capacity as beneficiary.  However, there are options.  A beneficiary may seek the removal and replacement of the executor if the executor is in a position of conflict or refuses to take adequate steps to pursue proper claims to recover estate assets.  Removal and replacement of executors is considered in a separate post found here.

A beneficiary may also seek leave from the court to bring proceedings to recover property or enforce a right, duty or obligation owed to the deceased person that could be brought by the personal representative, when the personal representative fails to bring that claim, under s. 151 of the Wills, Estates and Succession Act [SBC 2009] Chapter 13.  The beneficiary must show that they have made reasonable efforts to cause the personal representative to commence the proceeding, and that they are acting in good faith, and it must appear to the court that it is necessary or expedient for the protection of the estate or the interests of the beneficiary that the proceeding to be brought.

COVID-19: Court appoints interim committee who proposes to keep mother out of care facility until health emergency subsides

May 11, 2020

While the B.C. Supreme Court is starting to hear certain limited non-urgent matters, for the most part the courts are still only hearing urgent and essential matters. We discussed what elder law and estate litigation matters might be considered “urgent” or “essential” in a previous post which can be found here.

The court recently heard such an urgent application in Cho (Re) 2020 BCSC 689, which arose as a result of COVID-19.  In Cho, the petitioner sought a declaration that his mother was incapable of managing her affairs, and an order appointing him as committee to manage his mother’s affairs and person. His sister agreed that their mother should be declared incapable, but sought an order appointing her as committee instead of her brother.  The two other siblings supported her appointment as committee.

The urgency arose because the siblings disagreed as to where their mother should reside and what arrangements should be in place for her care during the COVID-19 health emergency.  The mother had been residing in a long term care home in the Vancouver area.  In light of concerns with the mother staying in the care facility and risking exposure to COVID-19, she was removed from the care facility to reside with the respondent daughter.  The daughter’s plan was for her mother to reside with her until the end of the health emergency.  The petitioner brother disagreed with that approach, and wanted to move his mother to his residence for a two week quarantine, followed by re-evaluation, which left open the possibility that his mother could return to the care facility before the health emergency subsided.

The parties agreed that the court could make an interim order to deal with the urgent concerns, and deal with the dispute over who should be committee for the longer term at a later date.

The judge considered the merits of the competing committeeship applications, which is a fact specific inquiry where the court looks at a number of factors, including whether the appointment reflects the patient’s wishes (as expressed when they were capable), whether immediate family members are in agreement with the appointment or whether there is conflict between family members, and whether the proposed committee would be likely to consult with immediate family members for appropriate care of the patient.

After discussing each factor, the judge appointed the respondent daughter as interim committee.  One of the most significant factors in favor of the daughter’s appointment was whether the proposed committee has an appropriate plan of care and management for the patient and his or her affairs and is best able to carry it out.  In effect, the court agreed with the plan to keep the mother out of the care facility until the end of the COVID-19 health emergency, and appointed the person who advocated for this plan.

It is not unusual for siblings to have disputes over the care of their elderly and incapacitated parents, and for these disputes to end up before the courts.  It is not surprising that a COVID-19 related dispute of this type has made its way before the courts.

Skipping your Children and Leaving your Estate to your Grandchildren? The Court may vary your Will

May 5, 2020

A parent often worries about their children fighting over their estate after their death.  Parents seek ways to avoid conflicts between their children after their passing, while at the same time maintaining the testamentary autonomy to dispose of their estate as they see fit.  It may seem attractive to skip a generation, and leave your estate to your grandchildren, in the hopes of avoiding conflict between your children. There may be other reasons to benefit your grandchildren.  You may have better, less complicated relationships with them.  Grandchildren may also have greater financial need to establish themselves.

However, issues (and claims) still arise. What if one of your children has more grandchildren then the other children?  Does each grandchild get an equal amount, or does each “branch” of grandchildren divide the same amount equally?  Can you provide a greater benefit to your “favorite” grandchild?  What if one child doesn’t have any children?  What if you have already provided gifts or other benefits (for example, payment of tuition) to some of the grandchildren during your lifetime, but they others?

In B.C. there is another complication: the ability of children (and spouses) to bring wills variation claims. A spouse or child of a deceased person may bring an action to vary the deceased person’s will if it does not make adequate provision for the proper maintenance and support of the spouse or child.  A grandchild does not have standing to vary a will. They will have to be happy with what you decide to give them (subject to the will being varied to reduce their bequest as a result of a wills variation claim by someone who does have standing).

In Scurek v. Scurek 2020 BCSC 450, the Court recently considered whether a testator can discharge his moral obligation to his adult daughter by benefiting her sons at her expense. The deceased had two adult children, a son and a daughter. His daughter (the plaintiff) had two sons, the deceased’s grandchildren.  The plaintiff daughter had no significant assets, and was disabled and unemployable.

Rather than dividing his estate equally between his two children, the deceased decided to leave one half of his estate to his son, and the other half of his estate to his daughter and her two sons in equal shares.  As a result, the daughter received a 1/6 share instead of a 1/2 share.  The estate was worth approximately $1.6M. The plaintiff sought to increase her share of the estate at the expense of her brother’s share. Her position was that her sons’ shares should not be touched. Her brother argued that the will should not be varied, because it reflected a notional equal distribution to the deceased’s son and daughter, but also reflected a concern that if one half of the estate were given to the daughter, it would be wasted due to her inability to manage money, given her past history, thus leaving the grandsons with no benefit.

The judge held that the deceased could not discharge his moral obligation to his child by benefiting her children at her expense. The fact that one-third of the estate was allocated to the plaintiff’s sons “is of no material benefit to her” and her sons “are not obligated to support her, and they can be expected to prioritize their own needs”.  The deceased’s alleged concern that the plaintiff would waste her share of the estate was speculation. Even if it was established that the deceased had this concern, it was unfair and deserved little weight. The plaintiff was a hard worker, who had not been fortunate in financial matters.

As a result, the Court varied the will to provide as follows: ½ to plaintiff, 2/6 to the brother, and 1/12 to each grandchild.

Wills variation claims are fact specific. While a will-maker can certainly make provision for grandchildren, a deliberate attempt to skip over children and provide “their share” to their children (the grandchildren) may result in a variation of the will in favor of that disinherited child.