B.C. Court of Appeal upholds existence of secret trust

If a person does not make a will (i.e. the deceased dies intestate), then the B.C. Wills, Estates and Succession Act sets out who will receive their estate. But what if the deceased person instructs the person entitled to receive their estate that the assets are actually to go to someone else? If the person entitled to receive the estate assets accepts the instructions from the deceased person, then a secret trust may be created.

In the recent case of Bergler v. Odenthal 2020 BCCA 175, the B.C. Court of Appeal upheld a trial decision which held that a secret trust existed, with the result that the person who would have received all of the deceased’s assets on an intestacy actually held the assets in trust for another person. I discussed the trial decision in a previous post found here.

Full disclosure: I was counsel for the successful plaintiff/respondent in this case at trial and on appeal.

The deceased had told her spouse (who would receive her assets on an intestacy) that she wanted her assets to go to her niece, who did not have a career or a home and was hoping to go back to school. The deceased did not have a will, and instead relied upon her spouse to do what she instructed.

On appeal, one of the key issues was timing of distribution. The niece argued that the deceased instructed her spouse that he was to deliver her assets to the niece when the spouse started a new relationship (which had happened before trial). The spouse argued that the deceased had “clarified” that the niece was to receive the assets only upon his death and not before. The trial judge did not accept that the deceased made this clarification. It also wasn’t consistent with the deceased’s wish that her niece receive her assets to get on a better financial footing and continue her education. If that was the purpose of the trust, then it would not make sense to postpone the niece’s receipt of assets until the spouse’s death, which may not happen for many years.

The Court of Appeal held that the trial judge had not erred in finding that a secret trust had been created, and that the spouse had accepted the obligations of the trust in conversations with the deceased in the last days of her life.

The spouse also took the position that if he held the deceased’s estate in trust, then the deceased’s interest in a piece of property that was registered in joint tenancy with him did not form part of her estate. When a property in British Columbia is held in joint tenancy, then upon the death of one of the joint owners their registered interest is received by the surviving joint owners by right of survivorship. As a result, the interest in jointly held property often does not form part of the deceased’s estate (for example, for the purpose of calculating probate fees).

However, the Court of Appeal confirmed that as a matter of law, the creation of the secret trust severed the joint tenancy, and the deceased’s interest in the property, even though registered in joint ownership, formed part of the trust and the beneficiary (her niece) was entitled to that interest.

As noted in my previous post which discussed the trial decision, it is very risky for a testator to make the deliberate decision to forgo preparing a will, and instead provide verbal instructions to the person that would otherwise be entitled to receive the estate on an intestacy regarding what you want done with your estate. There is a very real risk that this person may deny receiving such instructions and may deny the existence of a trust.

If you are a beneficiary (by way of intestacy or under a will) and the testator provides you with instructions regarding the assets that you will receive upon their death, exercise caution. Even silence may constitute acceptance of the trust obligation. The courts take the view that if a testator makes a request of this nature, you should be bound to say something if you intend to reject the instructions and seek to claim the assets as your own after the deceased’s death.

Ontario Court allows Deceased to Bequeath Assets held by his Company in his Will

When you are the sole shareholder of a company, for example a professional corporation or a holding company, you may fall into the habit of treating the assets held by the company as your own for all practical purposes. However, you should keep in mind that a corporation is a separate legal entity, which owns its own assets. You merely own the shares in the corporation which in turn owns those assets.

This may create confusion when it comes to your estate planning. When your corporation owns assets, can you make bequests of those assets in your will?

A 2019 decision of the Ontario Court of Appeal indicates that in some cases the answer is “yes”.

In Trezzi v. Trezzi 2019 ONCA 978, the deceased was the sole shareholder of a company. The company owned certain assets. The deceased made bequests of those assets in his will. The bequests were challenged on the basis that the deceased did not own the assets, as they were owned by the company, and he could not give what he did not own.

The Court of Appeal upheld the lower court’s decision that the deceased could bequeath the assets of his company in his will. In doing so, the court looked at the deceased’s intention, which was to distribute all of the assets of the company and wind it up. The court held that the trustees had two independent sources of authority to implement his intention to wind-up the company: general powers available under corporate law, and powers set out in the will which permitted them to convert estate assets into money.  The principle of the corporation as a separate entity did not complete the analysis of whether a testator who is the sole shareholder of a corporation can gift corporate assets.

It is still risky for will-makers in British Columbia to assume that you can deal with assets held by your corporation in your will. Trezzi was an Ontario case and so it is not binding in British Columbia. The case has not yet been considered in British Columbia, and it may not be followed. Instead, the courts in British Columbia may prefer to protect the sanctity of the corporation as a separate entity or may require very clear instructions that the executors are authorized to deal with the property held by the corporation.

Even in Trezzi, the court noted that it would have been preferable had the will been more explicit in referring to the trustees’ authority to deal with his corporation’s property.

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

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.

Estate Plans and Fraudulent Conveyances

What is a Fraudulent Conveyance?

For more than four centuries there have been restrictions on the ability to dispose of property to delay, hinder or defraud creditors and others of their just and lawful remedies. This began in 1571 in England with the Statute of Elizabeth and they are now encapsulated in the Fraudulent Conveyance Act, RSBC 1996, c. 163 (the “FCA”) in British Columbia and across Canada in similar legislation. All such dispositions or transfers by any method are void against any person or the person’s assignee or personal representative whose rights are adversely affected by the transaction. An exception exists for transfers of property for valuable consideration and without knowledge of the collusion or fraud of the transferor.

The absence of lying or deceit does not absolve a defendant from a claim of fraudulent      conveyance. The only intent necessary to void transactions under the modern FCA is the intent to put assets out of the reach of creditors and potential creditors. No further dishonest or morally blameworthy intent is required.

Does the FCA Apply in the Context of Estate Matters?

Transactions commonly carried out for estate planning purposes, such as gifts and the settling of trusts and transfers of property into joint tenancy may be caught by the FCA. For example, an estate plan whereby real property was transferred into joint tenancy and a trust was created to   hold other assets was cancelled because it had been made for an improper purpose: Antrobus v Antrobus, 2009 BCSC 1341. Similarly, a terminally sick wife’s transfer of her property into joint tenancy with her husband to avoid the claims of her creditors was a fraudulent conveyance: Vancouver Coastal Health Authority v. Moscipan, 2019 BCCA 17.

Creditors and Others

The term “creditors and others” includes present creditors, future creditors and those who might become creditors of a debtor. A plaintiff seeking an order reversing a transfer does not need to show that he or she was a creditor of the transferor at the time of the transaction. It is sufficient if the possible claim was within the contemplation of the transferor: Abakhan & Associates Inc. v. Braydon Investments Ltd, 2008 BCSC 1547; aff’d 2009 BCCA 521.

However, for the purposes of the FCA, a possible claim does not include a claim against the estate of the transferor pursuant to the Wills Estates and Succession Act, SBC 2009, c. 13, (“WESA”). Such will variation claims do not satisfy the test because they do not arise until after the death of the transferor. To be able to use the FCA to successfully attack a transfer, a spouse or child of the transferor must have had a legal or equitable claim against the transferor during his or her lifetime, and the claim must not be trivial: Mawdsley v Meshen, 2010 BCSC 1099; 2012 BCCA 91.For example, in Antrobus the plaintiff had an unjust enrichment claim against her parents while they were alive based on her long-time services to them and their promises that she would receive their estate.

FCA Claim Made to Replenish the Estate

If a spouse or child establishes that a transfer by his or her spouse or parent was a fraudulent conveyance, the asset may be available to satisfy a wills variation claim against the transferor’s estate pursuant to WESA. In effect, the estate will be replenished with the asset which had been fraudulently conveyed away. However, to repeat, this only applies when the FCA claim has the essential foundation of a legal or equitable claim against the transferor existing during his or her lifetime.

Intention and the Badges of Fraud

The crux of a fraudulent conveyance claim is often the intention of the transferor when making the transaction. Estate planning transactions, including settling trusts and transferring assets to the trustee, transferring assets into joint tenancy or into a corporation as part of an estate freeze, and other gifting, are recognized as legitimate transactions unless the court concludes that the transfer was intended to deprive a creditor or other of a just and lawful remedy. Intention is a state of mind and a question of fact to be determined in each case. In circumstances where the impugned transaction was not made for valuable consideration, a presumption of fraud arises, but the presumption may be rebutted by evidence that the transferor did not act in furtherance of an improper purpose.

The so-called badges of fraud are often referred to by the court when deciding whether to draw an inference of fraudulent intent within the meaning of the FCA. The indicia considered may include the state of the transferor’s financial affairs at the time of the transfer, the relationship between the transferor and the transferee, the effect of the transfer on the over-all assets of the transferor, evidence of haste in making the disposition, the timing of the transfer relative to knowledge of a claim against him or her, whether the transferee gave any valuable consideration for the transfer, the transferor remaining in possession and having use of the asset following the transaction, and secrecy in making the transfer.

Evidence that the transferor did not act in furtherance of an improper purpose may include lack of debts or obligations to the claimant or others, a remaining estate sufficient to satisfy any possible claim, an oral or written agreement that the transferor and his or her spouse would keep their assets separate and be able to deal with their assets free from claims by the other, an oral or written agreement that their respective estates would be left to their respective children from prior relationships, knowledge of any such agreement by others, providing for a subsequent spouse or child, other legitimate estate planning purposes such as avoiding future wills variation claims and probate fees and other taxes, and the lack of evidence of a fraudulent intent as opposed to speculation.

Will a Concurrent Valid Purpose Cure the Taint of an Improper Purpose?

The short answer is “No”.  There will often be more than one reason for an estate plan. Sometimes estate plans are created to hide improper purposes. The FCA simply says that if made to delay, hinder or defraud, a disposition is void. The authorities clearly establish that dispositions or transfers made in part to insulate an asset from the grasp of a creditor will not be excused by a concurrent lawful purpose, even when the transferor acted on professional advice.