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.

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

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.

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

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.

Committees in BC – Orders Requiring Unwilling Adults Examined to Determine Capacity

In British Columbia, the Patients Property Act allows a person to apply to Court for a declaratory Order that another adult person is incapable of managing his or her affairs. Such incapacity may be due to mental infirmity arising from disease, age or otherwise, or disorder or disability of mind arising from the use of drugs. To succeed, the applicant must submit to the Court affidavits from two medical practitioners providing opinions that the person who is the subject of the application is incapable of managing his or her affairs.

If the Court is satisfied by the two affidavits and any other evidence, the applicant or someone else will be appointed “committee” to make decisions on behalf of the person, now referred to as the “patient”, concerning his or her financial and estate affairs or person or both. Also, a person   who has been subject to examination at a Provincial mental health facility or psychiatric unit may become a “patient” if the Director signs a Certificate of Incapability. For example, in Johnston Estate v. Johnston, 2019 BCSC 2149, the patient was willingly examined at a psychiatric unit and the Public Guardian and Trustee was appointed committee of his financial and legal affairs. When a committee is appointed, powers of attorney and representation agreements previously signed by the patient are suspended.

What If the Person Does Not Co-operate?

For many years it was accepted that the Patients Property Act did not give the Court jurisdiction to order a medical examination before two medical affidavits had been produced. In other words, if the proposed patient would not co-operate and agree to be examined, the applicant was out of luck. Then in 2012 the door was opened to ordering an adult person to attend for medical examinations for the purposes of the Patients Property Act in appropriate circumstances.

In Temoin v Martin, 2011 BCSC 1727, the Court addressed a situation where the elderly businessman who was the subject of the application refused to be examined by two medical practitioners and the applicant, his daughter, was unable to obtain the necessary affidavits. The daughter argued that there was an inadvertent gap in the legislative scheme, namely that there was no statutory means by which a court could compel an individual to undergo the necessary medical assessments to determine capacity. She relied on Supreme Court of Canada judgements saying the Court had inherent discretionary jurisdiction, which was not derived from a statute, to make orders to protect the interests of children and vulnerable adults.

The judge agreed that if there was prima facie proof of incompetence and a compelling need for protection the inherent jurisdiction would extend to ordering a person to attend for medical examination, but Temoin was not such a case. The Court of Appeal agreed: 2012 BCCA 250, pointing out that the starting point for such an application was the presumption of capacity of the person to be protected, the importance of the Charter values of liberty, autonomy, and equality, while emphasizing that the inherent jurisdiction must be used cautiously and only for the benefit of the person to be protected, and not for anyone else. The daughter’s motive of trying to gather evidence with which to attack her father’s recent estate planning was a relevant consideration when assessing her evidence. In cases of this kind, the applicant must present evidence establishing a serious question to be tried, both as to the capacity of the individual and his or her need for protection.

After Temoin, applications were made to compel unwilling adults to undergo mental capacity testing but none were successful until 2017 when the case of Singh (Re) became the first successful Temoin application: 2017 BCSC 984. In the Singh case, unlike in Temoin, the judge was satisfied that a medical opinion from the family doctor and evidence of questionable financial dealings raised serious questions as to both mental capacity and the need for protection, so the order was made.

So far, there have been no other reports of successful Temoin applications. Thus, while the door has opened to ordering an adult person to attend for medical examinations for the purposes of the Patients Property Act, it is not wide open. Nevertheless, Singh demonstrates that such orders are available if the applicant is able to present the right kind of evidence, even over the objections of the person to be protected and anyone else who opposes. Hopefully, this will provide helpful guidance for families struggling to deal with uncooperative or alienated loved ones who refuse the medical examinations needed so orders to protect them can be obtained.

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.

Passing over the Executor: What BC Law Says About Executor or Administrator Conflicts of Interest

What if you are a beneficiary under a will, and you have concerns about the person named as executor in that will? Maybe you believe the named executor is in a conflict of interest or may not treat the beneficiaries with an even hand (especially if the will allows for the exercise of some discretion by the executor). Maybe you suspect that the named executor will engage in impropriety or misconduct once they obtain a grant of probate. Maybe you simply do not get along with the named executor. At what point is it appropriate to ask that the court pass over a person as executor or administrator of an estate?

The Wills, Estates and Succession Act, S.B.C. 2009, Chapter 13 [“WESA”] allows for a person having an interest in an estate to apply to remove or pass over a personal representative. To “pass over” means to grant probate or administration to a person who has less priority than another person to become a personal representative. This means passing over a named executor where there is a will, or passing over the person entitled to become administrator if there is an intestacy (no will).

The court may pass over a person entitled to become the personal representative if the court considers that the person should not be granted probate or administration. Section 158 of WESA includes a non-exhaustive list of circumstances that the court may consider. Some of them are clear, such as if the person refuses to accept the position, or is incapable of managing his or her own affairs, or has been convicted of an offence involving dishonesty.

Subsection 158(3)(f) is more general, and allows the court to consider whether the person is (1) unable to make the decisions necessary to discharge the office of personal representative, (2) not responsive, or (3) otherwise unwilling or unable to or unreasonably refuses to carry out the duties of a personal representative, to an extent that the conduct of the personal representative hampers the efficient administration of the estate.

The court will consider the following principles when deciding whether to pass over an executor named in a will:

  1. Recognize that the testator’s choice of estate trustee should not be lightly disregarded. A deceased’s right to nominate his executors is not to be lightly interfered with;
  2. Require clear evidence of necessity;
  3. Focus on the main consideration of the welfare of the beneficiaries; and
  4. Require proof that the executor’s acts or omissions are of such a nature as to endanger the administration of the estate.

In the recent case of Gawdun v. Lord 2020 BCSC 266, the court considered an application to pass over the person named as executor of the deceased’s will. The deceased and the proposed executor (“Ms. Lord”) were in a common law relationship at the date of death. The applicants were the deceased’s children from a previous marriage.

The plaintiffs argued that Ms. Lord should be passed over for the following reasons:

  1. The plaintiffs doubted that Ms. Lord would maintain an even hand between her own children and the plaintiffs, all of whom were residuary beneficiaries;
  2. The plaintiffs alleged that Ms. Lord had continually demonstrated hostility and animosity towards them and the deceased’s sister (who was named as co-executor);
  3. The plaintiffs alleged that Ms. Lord was involved in the deceased’s estate planning in 2010 and 2011, which resulted in the execution of the will providing the majority of the estate to Ms. Lord and her children, which conduct was at issue in an underlying wills variation application;
  4. The plaintiffs alleged that Ms. Lord offered to pay the deceased’s sister $50,000 from the estate during the course of the action which the plaintiffs found suspicious;
  5. Foreclosure proceedings had been initiated to recover funds owing to the estate, which was being funded entirely by the plaintiffs, and Ms. Lord had refused to assist in collecting the debt owing; and
  6. The plaintiffs alleged Ms. Lord entered into a share exchange agreement as attorney for the deceased. The terms of the share exchange agreement were alleged to have conferred an improper benefit on Ms. Lord.

The court dismissed the application, concluding that passing over Ms. Lord was not justified. There was no evidence demonstrating misconduct by Ms. Lord that was capable of supporting a decision to pass her over. Even if the court accepted there was misconduct as alleged, it is past misconduct and was not done in her capacity as executor.

If may be difficult to convince a judge that a person will endanger the welfare of the beneficiaries or commit misconduct as executor or administrator before they have even been appointed. If you have concerns about the person who is entitled to be personal representative, but don’t believe that you can succeed with an application to pass over, you may also bring an application remove and replace a personal representative if those concerns become a reality. This will be discussed in an upcoming post.

Removal of Human Reproductive Material from a Deceased Person

There are some fairly typical claims that we see in estate litigation:  wills variation, lack of testamentary capacity, undue influence, resulting trust over jointly owned assets, and improper conduct by executors.  L.T. v. D.T. Estate 2019 BCSC 2130 [“L.T.”], a decision of the B.C. Supreme Court handed down on December 9, 2019, was not a typical estate litigation case.

In L.T., the petitioner wife applied for an order that her deceased husband’s sperm be removed from his body to be used for reproductive purposes by his wife.

The Assisted Human Reproduction Act and the Assisted Human Reproduction (Section 8 Consent) Regulations allow you to provide written consent to remove human reproductive material from your body after your death for the purpose of creating an embryo.

However, the deceased person had not provided his written consent in the L.T. case.  The deceased and his wife had never discussed the issue.  He had died suddenly and unexpectedly.  He had been in a long term relationship with his wife.  They had very recently become parents, and it was accepted that the deceased expressed while alive that he wished to have more children.

The wife argued that the requirement for written consent should only apply when a deceased person contemplated or anticipated their death, and should not apply when the death was unexpected.  The court rejected this argument.  The court also rejected the argument that the sperm removed and stored (pending a court ruling) was property which vested in the wife.

The application was dismissed.  The wife was not entitled to receive her deceased husband’s sperm for reproductive purposes because he had not provided his written consent during his lifetime.

As the court noted, most young couples do not put their minds to this set of circumstances.  But with ever-improving technologies and changing views of ethics and the family, this is likely a discussion that will continue in the home, in the legislature, and in the courts.