Wills & Estates: Dual Wills

It is becoming increasingly common for lawyers to discuss or recommend to clients to have two wills prepared if the testator has a substantial investment in one or more private companies .

This plan involves having one will to govern the estate assets that require probate and a second will to govern those estate assets that do not require probate. The customary objective is to achieve a significant savings in Estate Administration Tax.

Usually the will that governs the assets requiring probate is called the “Primary Will” and is signed first, and the will that governs the assets that don't require probate is called the “Secondary Will” and is signed immediately afterwards.

Assets that can usually be dealt with without the necessity of a formal grant of probate by the court include things like shares in a privately held corporation, partnership interests, beneficial interests in a trust, unsecured debts, and household goods and personal effects except for those that are specifically dealt with under the primary will.

Sometimes even real property can be transferred without probate. This usually includes lands where the title is still registered under the Registry Act, or on the first dealing with lands being converted from the Registry Act system to the Land Titles system.

If you are dealing with a specific parcel of land in the Secondary Will, you should consider having a fall back provision in the Primary will in case the property ultimately cannot be dealt with without probate.

Dual wills however should not necessarily be used automatically in every case where the testator has shares in a private company. There are a number of important considerations and potential problems in using dual wills.

It is important that they be signed in the proper order and that the revocation clause set out in each will be different and properly worded. Otherwise, one of them might inadvertently revoke the other.

If different estate trustees are appointed there could be some overlap or dispute about their respective responsibilities. You might want to be more specific about the division of responsibilities than you would in a case where you only have one will. For example, which estate trustees are going to be responsible for preparing and filing income tax returns? In the event of a conflict or dispute which trustees would have the ultimate decision-making authority?

If there will be a beneficiary designation in the will(s), for life insurance, RRSP,RRIF, TFSA etc, it is generally better to put these in the Primary will because if they are in the Secondary will and prove ineffective that could taint the Secondary will and could result in having to pay Estate Administration Tax on the whole secondary estate.

If there are different beneficiaries, and especially if there are different residual beneficiaries, you should consider carefully which Estate is to pay which debts and taxes on which properties and assets. This might include income tax on RRSP’s, RRIF’s and capital gains tax on taxable property.

Again if there are different beneficiaries and the possibility that there will not be enough in the estate, or the residue of the estate to satisfy all debts, taxes and legacies, consider setting out specifically who is to bear these charges and which legacies will be reduced in what order or by how much.

Lastly, we recommend that you avoid using a codicil(s) to amend dual wills. There is a risk of an unintended revocation because a codicil effectively republishes the will it refers to as of the date of the codicil. With modern will drafting technology it is generally simple enough and more prudent to prepare complete new dual wills.

Anyone with a substantial investment in a private company or other assets that might not require probate should consider making dual wills and should obtain sound legal advice before doing so.

It is important to understand the advantages of dual wills, but also to be aware of the special pitfalls and problems they can create. They are not necessarily appropriate in every case just because the testator has a private company.

— Craig M. Bater for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

Executor's Compensation

What is it?

Executor’s compensation is the money that is paid by an Estate to the trustee(s) or executor(s) who manage the Estate. A trustee or executor is the person appointed in a will to manage the affairs of the deceased's estate. Although those terms refer to different roles they are often used together because the same person(s) is often appointed to take on both roles. Normally, after a person dies, there are bills to pay, there are bank accounts to manage (i.e. close the existing account and open a new account in the name of the Estate), there are taxes to be paid, there may be real estate to manage or sell, there may be disputes to settle etc. When all is resolved, hopefully there will be a balance in the Estate to distribute to the beneficiaries under the will.

Some estates are large in value and some estates are small in value. Some estates are complex and require that the executors do a lot of work. Some estates are simple and don't require that the executors do much work at all. No one is expected to work for free. The question becomes, how much financial compensation should an executor receive for the work they do on behalf of a particular Estate? That is the issue known as "Executor's Compensation.”

How much should be paid to an executor?

       Should the Executor Waive Compensation?

The first point to recognize is that where the executor and the residual beneficiary are the same person there is no financial benefit (and a tax disincentive) for the estate to pay executor’s compensation. In those cases the executor would normally waive any compensation. For instance, a husband may appoint his wife as his primary executor and may also name her as the sole residual beneficiary of his will. In that case there would be no point in paying her compensation for her work as an executor. Effectively, she would be paying herself and she’d have to pay income tax on the money paid to her as executor’s compensation whereas the bequest under the will is not subject to income tax. (See Scenario #1 at the end of this article.)

      Where Executor’s Compensation is Claimed by an Executor

Where the executor claims executors compensation, how is that compensation quantified? It may be that the residual beneficiary and the executor come to an agreement as to a fair and reasonable allowance to be paid for executor’s compensation. If the parties are unable to agree upon an amount, then the executor is entitled to pass his/her accounts and in the process of passing accounts to claim executors compensation. It is then up to the beneficiaries (or some of them) to object to the passing of accounts. In Ontario a single judge of the Superior Court of Justice has jurisdiction to quantify executor’s compensation. Set out below is a summary of the legal guidelines and principles applied by the Court in fixing executors compensation.

Statutory Authority

In Ontario the statutory authority enabling the Court to permit a fair and reasonable allowance upon a passing of accounts for the effort expended in the administration of the estate is found in section 61 of the Trustee Act, which says that;

“A trustee, guardian or personal representative is entitled to such fair and reasonable allowance for the  care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.”

The courts have developed guidelines for quantifying what is “fair and reasonable” compensation. The usual starting point is an amount equal to 5% of the estate or:

2.5% on capital receipts;

2.5% on capital disbursements;

2.5% on revenue receipts; and

2.5% on revenue disbursements.

In addition, the courts will often allow a management fee of 2/5 to 3/5 of 1% of the average annual value of the gross assets under administration.

It is also possible for the executor to request a special (i.e. additional) fee where additional compensation is required to fairly compensate the executor for the work and responsibility taken on by him/her.

The case law interpreting section 61 of the Trustee Act has developed 5 factors which are to be considered in reference to executor’s compensation on a passing of accounts:

a. The magnitude of the trust;

b. The care and responsibility involved;

c. The time occupied in performing the duties;

d. The skill and ability displayed; and

e. The success which has attended its administration.

Toronto General Trusts Corp. v. Central Ontario Railway Co. (1905), 6 O.W.R. 350;1905 CarswellOnt 449 (Ont. H.C.)

The law concerning executor's compensation is set out in Jeffery Estate (Re) (1990), 39 E.T.R. 173, 1990 CarswellOnt 503 (Ont. Surr. Ct.) at paras. 13 & 16 in the following terms:

  

“… In Ontario, at least, a practice has developed of awarding compensation on the basis of 2 ½ per cent against the four categories of capital receipts, capital disbursements, revenue receipts and revenue disbursements along with, in appropriate cases, a management fee of 2/5 of 1 per cent per annum on the gross value of the estate…. Beyond this, of course, the cautionary words of the Re Atkinson case, emphasize that the use of percentages must not become a ritual.

…

To me, the case law and common sense dictate that the audit judge should first test the compensation claims using the “percentages” approach and then, as it were, cross check or confirm the mathematical result against the five factors approach set out in Re Toronto General and Central Ontario Railway ….The process is not scientific but it is not intended to be: in the estate context, it is a search for an award which reflects fairness to the executor; in a real sense, the search is for an appropriate quantum meruit award in a unique setting.”

In the case of Laing Estate v. Hines (1998), 167 D.L.R. (4TH) 150 O.C.A; 1998 CarswellOnt 4037 (Ont. C.A.) the Ontario Court of Appeal confirmed the law as expressed in Jeffrey Estate. At ¶ 9 of the Laing case the court stated:

“A court on a passing of accounts is obliged to first test the compensation claimed by applying the percentages and then cross checking the result in reference to the five factors with a view to achieving a fair and reasonable result.”

Conclusion

The ultimate question that the court must answer is what amount is “fair and reasonable” for the work performed and the responsibilities undertaken by the executor. The answer to that question is arrived at by:

1. Applying the percentages (i.e. 5% of the value of the estate);

2. Cross checking the result of the percentage approach in reference to the five factors

3. Using a broad brush approach rather than a fine calculation approach in considering the result.

Note:

Executor compensation issues can be very complex. Should such issues arise it is recommended that a lawyer be consulted to deal with the factual and legal circumstances of a particular case.

 

Scenario #1

The testator dies leaving an estate with a value of $1.0M. The testator appoints his wife as executor and she is the sole residual beneficiary of the estate.

If the wife did not take any executor's compensation she would receive $1.0M as residuary beneficiary.

If the wife took the normal executor’s compensation of 5% of the value of the estate as executor's compensation she would receive $50K as executor’s compensation and the balance of the estate ($950K) as residuary beneficiary. Note however that executor's compensation is taxable income (as wages) and therefore the wife would have to pay income tax on the $50K of say $20,000.00. In this case, as a result of claiming executor’s compensation, the wife would receive $980K (after tax) rather than $1.0M.

Logically therefore, where the executor and the sole residual beneficary are the same person, the executor will waive their entitlement to compensation and none will be paid.

Scenario #2

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

If the brother did not take any executor's compensation the wife would receive $1.0M as the residuary beneficiary.

If the brother asked for and the wife agreed to executor’s compensation of 5% of the value of the estate as executor's compensation the brother would receive $50K as executor’s compensation and the balance of the estate ($950K) would be paid to the wife as residuary beneficiary. The brother would have to pay tax on the executor’s compensation he received.

Scenario #3

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation. The testator’s wife objects to the brother receiving $50,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. The brother may receive $50,000.00 or he may receive less depending upon the view of the Court as to what is “a fair and reasonable allowance”.

Scenario #4

The testator dies leaving an estate with a value of $100K. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation plus a special fee due to the large amount of work involved in this particular estate. In this case the amount payable by applying the percentage approach is only $5,000.00. The testator’s wife objects to the brother receiving more than $5,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. In this case it may be that matrix of quantum of the estate and quantum of work required of the executor justifies an additional payment. Again, it depends upon the view of the Court as to what is “a fair and reasonable allowance”.

-- Philip W. Augustine for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

Wills and Estates 101 Mini-Series Part IV: Did He Die or Did He Separate?

In Ontario there is a family property regime set out in the Family Law Act (FLA) which provides for the equal sharing of property accumulated by married parties during their marriage. Note, this provision does not apply to common-law spouses. What happens if, after the death of one married spouse, it is discovered that the deceased spouse has given all of his or her wealth to someone other than his or her surviving spouse?

Suppose Harold was married to Wendy for 42 years. After his death his last will and testament left most of his estate to his “close friend” Susan. Harold left Wendy $50,000.00. Wendy feels betrayed (especially if her will left everything to Harold). What can Wendy do?

In Ontario the FLA permits the surviving married spouse of the deceased to elect to take either under the will or to make a claim against the estate for an equalization of net family property (NFP) pursuant to Part I of the FLA.

Assuming Harold had a NFP greater than Wendy, Wendy may wish to elect to make a claim for a monetary payment equal to one-half the difference her NFP and Harold’s NFP. For a more thorough discussion of NFP equalization, please click here to read a post by Philip W. Augustine.

When spouses separate, the valuation date is typically the date of separation. This means that the assets and liabilities of each spouse would be calculated based on their value at the date of separation. But, where one of the spouses has died, the FLA deems the valuation date to be the day before the date of death.

The surviving spouse has six months from the date of death to elect to take an equalization payment pursuant to the FLA rather than taking pursuant to the will of the deceased.

An example will illustrate how this election works.

At the date of his death Harold had Net Family Property of $600,000.00

At the date of Harold’s death Wendy had Net Family Property of $300,000.00.

Pursuant to the FLA Wendy is entitled to $150,000.00 calculated as follows: $600,000.00 - $300,000.00= $300,000.00

$300,000.00 /2 = $150,000.00

Pursuant to the will Wendy is entitled to $50,000.00 (see facts above)

Unless Jim’s will had expressly provided that Sally could both make the election under the FLA and take under the will, Sally would be forced to choose only one of the two options.

If forced to choose, it is obviously more beneficial for Wendy to take pursuant to the FLA ($150,000.00) than pursuant to the Will ($50,000.00). Wendy would be well advised to make an election to take pursuant to FLA. Wendy has 6 months to make that election, failing which she shall be deemed to take pursuant to the will.

Should a surviving married spouse feel that he or she has not received a proper division of property upon the death of their spouse they should promptly seek out legal advice so they are in a position to make the necessary election should it be in their interests to do so.

     – Michael D. Heikkinen and Philip W. Augustine for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about making an FLA election or would like Augustine Bater Binks to prepare your will, please email us at info@abblaw.ca or call 613-569-9500 to speak to one of our lawyers or a member of our staff.]

Wills & Estates 101 Mini-Series: Part II: Powers of Attorney

As the second installment in our mini series on wills & estates, we will review some of the basic legal principles about powers of attorney in Ontario, why they are important and how they fit into your overall estate plan.

A will is only effective from the date of the death of the testator. People however often need assistance in managing their “estate” (their property) or their personal care while they are alive if they are unable to do so themselves. This could be because of mental infirmity or because of an accident or physical limitations.

Therefore it has become customary when making a will to also prepare two power of attorney documents in order to have a complete estate plan in place. There is a Power of Attorney for Property and a separate one called a Power of Attorney for Personal Care. These documents give the “Grantor’s” power or authority to the appointed person(s), the “Attorney”, to manage his/her affairs and property and to make care decisions such as giving legally binding consent to proposed medical treatment or withdrawal of medical treatment or life support systems.

You should carefully consider who you wish to have this authority. These two kinds of Powers of Attorney are very different. There are different rules for when they come into effect and they involve very different kinds of decision making. You can appoint one or more attorneys, and if you appoint more than one, you can decide if they have to make decisions together or can act on their own. Your attorney for property and your attorney for personal care can be the same person or different people and they can be the same person as your executor. You could consider appointing an alternate attorney(s) in case the primary one is unable or unwilling to act.

Many people consider the appointment to be a statement about who the Grantor trusts more or who is the favourite, and worry that someone will be offended if not appointed. The duties of an attorney can however be very onerous. The law requires an attorney to keep very detailed accounting records, more detailed than a lot of people realize. The law sets out various duties to consult before making decisions, and requires attorneys to always act in the best interests of the grantor, not for one’s personal benefit. There are investment rules and other limitations on what an attorney can do. There are numerous court disputes over whether the attorney kept proper accounts or made proper decisions. Once the initial glow of being appointed wears off most attorney’s find out it is a lot of work and leaves them open to complaint or second guessing by various other people with the benefit of hindsight.

You should also keep in mind that a power of attorney made in Ontario might not suffice if the “grantor” moves to another province or country.

The bottom line is that powers of attorney for property and personal care are vital parts of any good estate plan, but you should understand and discuss all of these issues with your lawyer carefully before completing them.

— Craig M. Bater for abblaw.ca

[Watch for our next session on Powers of Attorney – hard work, good pay? Compensation for attorneys.  If you live in the Ottawa area and would like Augustine Bater Binks to prepare your will, please email us at info@abblaw.ca or call 613-569-9500 to speak to one of our lawyers or a member of our staff.]

Wills 101 Mini-Series: Part I: Choosing an Executor

This first installment of our mini-series on wills is meant to provide some basic information about the selection of an executor.

The estate trustee, also known as the executor, is the person named in a will who will be responsible for administering affairs after the death of the testator (the person making the will). This person will ultimately be responsible for ensuring that the testator’s final wishes are respected. Choosing who to appoint as an executor is a critical decision which a testator must make during the estate planning process.

A testator needs to instruct his or her lawyer as to the person (or people, if more than one) who he or she wants to act as the executor of their estate.

It is possible that the person selected will predecease the testator or be otherwise unable to act as executor. It is therefore advisable to appoint a secondary executor to act in the place of the primary executor in the event that he or she is unable to act.  It is also possible to appoint more than one executor (i.e. a group of 3) with an express statement that either the group of executors must act unanimously or by majority.

There are many considerations that go into the choice of executor, but frequently it is a trusted family member or close friend.  Ideally, the person is able to handle business affairs (i.e. opening an Estate bank account, sell a house).  If an estate is complex, it may be prudent to consider appointing a professional estate trustee, such as a lawyer or an accountant.

It isn’t essential that the person live in the same town as the testator, but it is more convenient.  If the executor is an Ontario resident it eliminates the issue of the possibility of having to post a bond. Moreover, it is important to note that the executor can also be a beneficiary of the estate.

It is generally wise for the testator to consult with the person he or she has chosen as executor prior to finalizing the will. Not only is it courteous to do so, but making appointees aware of their selection by the testator at an early stage will minimize the likelihood of them declining the role when it comes time to act.

If the testator has any doubts about appointing a particular person as executor, these concerns should be raised with the testator’s lawyer as early in the drafting process as possible. Likewise, if a testator appoints an executor and later becomes uncertain or apprehensive about the person chosen, the testator should act without delay to meet with a lawyer in order to discuss amendments to the will. Doing so will not only increase the probability that the estate will be administered smoothly, but it will also provide the testator with peace of mind.


– Philip W. Augustine and Michael D. Heikkinen for abblaw.ca

[In next week’s Wills 101 blog, we will be discussing the fundamentals of powers of attorney for property and personal care. If you live in the Ottawa area and would like Augustine Bater Binks to prepare your will, please email us at info@abblaw.ca or call 613-569-9500 to speak to one of our lawyers or a member of our staff.]